Economic Analysis for Final
Action for Effluent Guidelines and
Standards for the Construction
and Development Category
March 2004
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U.S. Environmental Protection Agency
Office of Water (4303T)
1200 Pennsylvania Avenue, NW
Washington, DC 20460
EPA-821 -B-04-002
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DISCLAIMER
Neither the United States government nor any of its employees, contractors, subcontractors or
other employees makes any warranty, expressed or implied, or assumes any legal liability or
responsibility for any third party's use of, or the results of such use of, any information, apparatus,
product or process discussed in this report, or represents that its use by such a third party would not
infringe on privately owned rights. Mention of trade names or commercial products does not constitute
endorsement by EPA or recommendation for use.
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CONTENTS
Page
EXECUTIVE SUMMARY
ES.l Introduction ES-1
ES.2 Profile of The Construction & Development Industry ES-4
ES.3 Description of the Regulatory Options ES-6
ES.4 Economic Impact Analysis Methodology ES-6
ES4.1 Use of Engineering Costs in the Impact Analyses ES-8
ES4.2 Industry-Level Analyses ES-9
ES4.2.1 C&D Project Model System ES-9
ES4.2.2 C&D Firm Model System ES-10
ES.4.3 National-Level Analyses ES-11
ES4.3.1 Total Compliance Cost Model ES-12
ES4.3.2 Consumer Impact Model ES-12
ES4.3.3 C&D Partial Equilibrium Market Modeling System ES-13
ES4.3.4 Net Economic Impact Model ES-13
ES4.3.5 Government Impact Analysis ES-14
ES.4.4 Estimate of Social Costs ES-14
ES.5 Economic Impact Analysis Results ES-14
ES5.1 Costs per Acre ES-14
ES5.2 Impacts on Projects ES-15
ES5.3 Impacts on Firms ES-15
ES5.4 National Compliance Costs ES-15
ES5.5 Market Model Results ES-16
ES5.6 Net Economic Impacts ES-16
ES5.7 Impacts on Governments ES-17
ES5.8 Additional Impacts ES-17
ES.6 Final Regulatory Flexibility Analysis ES-17
ES.7 Benefits ES-19
ES.8 Costs and Benefits of the Regulatory Options ES-20
ES.9 Unfunded Mandates Reform Act ES-21
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CHAPTER ONE INTRODUCTION
1.1 Existing Regulatory Framework 1-2
1.2 Purpose of the Regulatory Options 1-5
1.3 Industries Potentially Affected by the Regulatory Options 1-5
1.4 Overview of Key Data Sources 1-6
1.5 Major Comments on the Economic Analysis for the Proposal 1-9
1.6 Report Organization 1-13
1.7 References 1-14
CHAPTER TWO PROFILE OF THE CONSTRUCTION & DEVELOPMENT
INDUSTRY
2.1 Introduction 2-1
2.1.1 Recent Trends in the C&D Industry 2-2
2.1.2 Data Sources Used 2-3
2.1.3 Organization of this Chapter 2-5
2.2 Industry Definition 2-5
2.2.1 Basis for Regulation 2-5
2.2.2 Industry Definition 2-6
2.3 Industry Characteristics 2-8
2.3.1 Establishment-Level Data 2-9
2.3.1.1 Number and Size of Establishments 2-9
2.3.1.2 Legal Form of Organization 2-12
2.3.1.3 Geographic Distribution 2-14
2.3.1.4 Employment 2-15
2.3.1.5 Payrolls and Benefits 2-16
2.3.1.6 Specialization 2-17
2.3.2 Firm-Level Data 2-19
2.3.2.1 Number and Size of Firms (SBA Data) 2-19
2.3.2.2 Firm-Level Revenues (SBA Data) 2-21
2.3.3 Number of Small Entities 2-21
2.3.4 Entities Not Covered by the Final Action 2-21
2.3.4.1 Establishments Engaged in Remodeling 2-24
2.3.4.2 Establishments That Are Not NPDES Permittees 2-25
2.3.5 Number of Potentially Affected Entities 2-25
IV
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2.4 Industry Dynamics 2-28
2.5 International Competitiveness 2-29
2.6 References 2-31
Appendix 2a. Crosswalk between 1997 NAICS and 2002 NAICS Structures 2-A1
CHAPTER THREE DESCRIPTION OF THE REGULATORY OPTIONS
3.1 Effluent Limitation Guidelines and Standards 3-1
3.2 Requirements under the Existing Construction General Permit 3-2
3.3 Summary of Regulatory Options/Technology Alternatives 3-3
3.3.1 Option 1 3-3
3.3.2 Option 2 3-6
3.3.3 Option 3 3-12
3.3.4 Option 4 3-12
CHAPTER FOUR ECONOMIC IMPACT ANALYSIS METHODOLOGY
4.1 Overview of Economic Impact Analysis Methodology 4-1
4.1.1 The Regulatory Baseline 4-2
4.1.2 Engineering Costs 4-2
4.1.2.1 Description of the Engineering Cost Categories 4-2
4.1.2.2 Assumptions Used in Estimating Engineering Costs 4-3
4.1.2.3 Land Use and Size Breakouts 4-4
4.1.2.4 State Equivalency Analysis 4-4
4.1.2.5 Accounting for Region-Specific Cost Factors 4-4
4.1.2.6 Adapting Engineering Costs For Use in the Economic Models 4-5
4.1.3 Overview of the Economic Models and Their Use of Engineering Costs . 4-6
4.1.3.1 Industry-Level Analyses 4-6
4.1.3.1.1 C&D Project Model System 4-9
4.1.3.1.2 C&D Firm Model System 4-10
4.1.3.2 National Level Analyses 4-11
4.1.3.2.1 Total Compliance Cost Model 4-11
4.1.3.2.2 Consumer Impact Model 4-12
4.1.3.2.3 C&D Partial Equilibrium Market Model System .. 4-12
4.1.3.2.4 Net Economic Impact Model 4-13
4.1.3.2.5 Government Impact Analysis 4-13
4.1.3.2.6 Estimate of Social Costs 4-14
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4.2 Analysis of Impacts on the C&D Industry 4-14
4.2.1 Methodology for Estimating Impacts on C&D Projects 4-15
4.2.1.1 Development of the Model Structure 4-16
4.2.1.1.1 Selection of Model Project Types and Sizes 4-16
4.2.1.1.2 Overview of EPA's C&D/PrMS Approach 4-18
4.2.1.1.3 Detailed Description of Model Projects 4-19
4.2.1.2 Inputs to the Model Projects 4-25
4.2.1.3 C&D/PrMS Analysis Approach 4-28
4.2.1.3.1 Baseline Model Project Performance 4-29
4.2.1.3.2 Results of a Sample Model Project Analysis
Assuming a Hypothetical Compliance Cost 4-31
4.2.2 Methodology for Estimating Impacts on C&D Firms 4-32
4.2.2.1 Development of the C&D/FrMS Structure 4-33
4.2.2.1.1 Selection of Model Firm Types and Sizes 4-33
4.2.2.1.2 Overview of the Approach Within the C&D/FrMS 4-34
4.2.2.1.3 Construction of the Model Firm Balance Sheets and
Income Statements 4-36
4.2.2.2 C&D/FrMS Analysis Approach 4-40
4.2.2.2.1 Incorporation of Compliance Costs 4-40
4.2.2.2.2 Financial Ratio Analysis 4-42
4.2.2.2.3 Analysis of Firm Financial Stress and Potential
Employment Effects 4-45
4.2.2.2.4 Barriers to Entry Analysis 4-55
4.3 National-Level Costs and Impacts 4-56
4.3.1 Methodology for Computing National Compliance Costs 4-57
4.3.1.1 Calculation of Adjusted Per-Acre Costs That Are Used
to Compute National Compliance Costs 4-57
4.3.1.2 Calculation of Number of Acres by Land Use Type and Size 4-58
4.3.1.2.1 Step One—Identifying Annual, Nationwide
Numbers of Acres Developed 4-59
4.3.1.2.2 Step Two—Distributing Acreage by Land Use
Type 4-59
4.3.1.2.3 Step Three—Distributing Acreage by Project Size 4-69
4.3.1.2.4 Step Four—Adjusting the Numbers of Acres
Downward to Account for the Regulatory Scope of
Options 2 and 4 4-69
4.3.1.3 Estimating Total National Costs 4-72
4.3.2 Methodologies for Measuring Impacts on Markets 4-73
4.3.2.1 Methodology for Measuring Impact on Consumers
(Single-Family Housing) 4-74
4.3.2.2 Methodology for Measuring Impact on the National
Housing Market 4-76
4.3.2.3 Methodology for Measuring Regional Market Impacts 4-78
4.3.2.3.1 Single-Family Housing 4-79
4.3.2.3.2 Multifamily and Nonresidential Construction .... 4-82
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4.3.3 Methodology for Modeling Net Economic Impacts 4-85
4.3.3.1 Calculation of Output and Employment Effects in the
U.S. Economy 4-86
4.3.3.2 Calculation of Welfare Effects 4-88
4.3.3.3 Regional Impacts 4-90
4.3.3.4 International Trade 4-91
4.3.4 Government Impacts 4-91
4.3.4.1 Administrative Costs 4-92
4.3.4.2 Compliance Costs 4-92
4.3.4.3 Impacts Associated With NSPS 4-93
4.4 References 4-94
CHAPTER FIVE ECONOMIC IMPACT ANALYSIS RESULTS
5.1 Overview of the Economic Impact Analysis 5-1
5.2 Calculation of Per-Acre Costs 5-3
5.3 Analysis of Impacts on C&D Projects 5-6
5.3.1 Overview of Methodology and Assumptions Used in
the C&D/PrMS 5-7
5.3.1.1 Types and Sizes of Projects Analyzed 5-7
5.3.1.2 Project Model Baseline Performance 5-8
5.3.1.3 Cost Pasthrough Considerations 5-8
5.3.2 Results of the Project-Level Analysis 5-10
5.3.2.1 Results for the Building Construction Sectors 5-10
5.3.2.2 Results for the Nonbuilding Construction Sectors 5-12
5.4 Analysis of Impacts on Model Firms 5-13
5.4.1 Overview of Methodology and Assumptions Used 5-13
5.4.1.1 Types and Sizes of Firms 5-15
5.4.1.2 Firm Model Baseline Performance 5-15
5.4.1.3 Cost Passthrough Considerations 5-16
5.4.2 Results of the Firm-Level Analysis 5-16
5.4.2.1 Impacts on Financial Ratios 5-17
5.4.2.2 Impacts on Firm Financial Health and Employment 5-17
5.4.2.3 Barrier to Entry Results 5-23
5.5 Analysis of National Compliance Costs 5-23
5.5.1 Overview of Methodology and Assumptions Used in the National
Compliance Cost Model 5-23
5.5.2 Estimate of Total National Compliance Costs 5-25
5.5.3 Estimates of Compliance Cost on a Per-Unit Basis 5-27
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5.6 Analysis of Impacts on Construction Markets 5-27
5.6.1 Analysis of Consumer Impacts 5-29
5.6.1.1 Overview of Methodology and Assumptions Used in the
Consumer Impact Model 5-29
5.6.1.2 Estimates of Consumer Impacts 5-29
5.6.2 Analysis of the National Housing Market 5-30
5.6.2.1 Overview of Methodology and Assumptions Used in the
National Housing Model 5-30
5.6.2.2 Estimates of Impacts on the National Housing Market 5-30
5.6.3 Analysis of Regional Markets 5-31
5.6.3.1 Overview of Methodologies 5-31
5.6.3.2 Estimates of Regional Market Impacts 5-32
5.6.3.2.1 Single-Family Housing Market 5-32
5.6.3.2.2 Multifamily Housing Markets 5-34
5.6.3.2.3 Commercial Space Markets 5-34
5.6.3.2.4 Industrial Space Markets 5-35
5.7 Analysis of Net Economic Impacts 5-36
5.7.1 Impacts on Output and Employment 5-37
5.7.1.1 Overview of Methodology and Assumptions 5-37
5.7.1.2 Estimates of Output and Employment Losses 5-37
5.7.2 Impacts on Welfare Measures 5-39
5.7.2.1 Overview of Methodology and Assumptions 5-39
5.7.2.2 Estimates of Impacts on Welfare Measures 5-40
5.7.3 Impacts on Regions and Communities 5-41
5.7.3.1 Overview of Methodology and Assumptions Used 5-41
5.7.3.2 Estimates of Impacts on Regions and Communities 5-41
5.7.4 Impacts on International Trade 5-43
5.8 Impacts on Governmental Units 5-43
5.8.1 Construction Program Administration 5-43
5.8.2 Government Construction Costs 5-46
5.9 Other Impacts 5-46
5.9.1 Requirements of Executive Order 12866 5-47
5.9.2 Environmental Justice 5-48
5.9.3 Children's Health 5-48
5.10 References 5-49
CHAPTER SIX FINAL REGULATORY FLEXIBILITY ANALYSIS
6.1 Introduction to the Final Regulatory Flexibility Analysis 6-1
6.2 Small Business Analysis Components 6-1
6.2.1 Need for and Objectives of the Rule 6-2
6.2.2 Significant Issues Raised by Public Comment 6-3
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6.2.3 Steps Used to Minimize Impacts 6-4
6.2.4 Estimated Number of Small Business Entities to Which the
Final Action Will Apply 6-4
6.2.4.1 Definition of Affected Small Entities 6-4
6.2.4.2 Number of In-Scope Small Firms Affected by the
Regulatory Options 6-5
6.2.5 Description of Recordkeeping, Reporting,, and Other Requirements ... 6-14
6.3 EPA's Analysis of Small Business Impacts 6-16
6.3.1 Classification of Model Firms for Impact Analysis 6-16
6.3.2 Revenue Test Methodology 6-19
6.3.3 Small Business Impact Analysis Results 6-23
6.4 References 6-27
CHAPTER SEVEN WATER QUALITY BENEFITS
7.1 NWPCAM Analysis Methodology 7-1
7.1.1 Description of NWPCAM Model 7-1
7.1.2 Valuation of Water Quality Changes 7-3
7.1.2.1 Water Quality Ladder Approach 7-4
7.1.2.2 Water Quality Index Approach 7-5
7.1.3 Nonquantified Categories of Benefits 7-6
7.2 Benefits Assessment Results 7-6
7.2.1 Environmental Assessment Results 7-8
7.2.2 Benefits Assessment Results 7-9
7.3 References 7-10
CHAPTER EIGHT COSTS AND BENEFITS OF THE REGULATORY
OPTIONS
8.1. Introduction 8-1
8.2 Social Costs of the Regulatory Options 8-2
8.2.1 Direct Social Costs 8-2
8.2.1.1 Compliance Costs 8-2
8.2.1.2 Government Regulatory Costs 8-3
8.2.2 Social Welfare Losses 8-3
8.2.3 Transitional Effects 8-4
8.3 Indirect Effects 8-4
8.4 Comparison of Estimated Costs and Benefits 8-5
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CHAPTER NINE UNFUNDED MANDATES REFORM ACT
9.1 Introduction 9-1
9.2 Analysis and Results 9-2
9.3 References 9-5
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TABLES
Table Page
Table 1-1. Industries Potentially Affected by the Regulatory Options 1-6
Table 2-1. Number of Establishments in the C&D Industry, 1992 and 1997 Economic
Census Data and 2000 County Business Patterns Data 2-3
Table 2-2. Comparison of Major Data Sources 2-4
Table 2-3. Industry Definitions for C&D Industry Profile 2-7
Table 2-4. Number of Establishments in the C&D Industry, Based on the 1997 Census of Construction
2-10
Table 2-5. Number of Small Establishments with Payrolls in the C&D Industry, Based on
Employment 2-11
Table 2-6. Number of Small Establishments in the C&D Industry, Based on Value
of Business Done 2-12
Table 2-7. Number of Establishments in the C&D Industry with Payrolls, by Legal Form of
Organization 2-13
Table 2-8. Number of Employees in the C&D Industry, Establishments with
Payrolls, in 1997 2-15
Table 2-9. Payrolls and Benefits for Employees in the C&D (Thousands of 1997 Dollars) .... 2-18
Table 2-10. Firms and Establishments by Employment Size and NAICS Codes,
2000—(SBA Data) 2-20
Table 2-11. Firms and Establishments with Payrolls by Revenue Size Class, 1997 (SBA Data) . 2-22
Table 2-12. Number of Firms and Establishments Above and Below SBA Thresholds for Small
Business Definition: (SBA Data) 2-23
Table 2-13. Number of Potentially Affected and In-scope Establishments in the C&D Industry . 2-27
Table 2-14. Housing Supply and Demand—Historical Data and Projections for 2001-2010
(average per year in thousands) 2-30
Table 3-1. Summary of Regulatory Options Considered for the Final Action 3-4
Table 4-1. Costs Incurred at Various Stages of a Residential Construction Project 4-26
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Table Page
Table 4-2. Model Parameters and Data Sources 4-27
Table 4-3. Baseline Model and Illustration of Impact of Incremental Option Requirements
on Model Project Under a Hypothetical Option—100 Percent Cost Passthrough
Scenario 4-30
Table 4-4. Model Single-Family Residential Construction Firm Financial Data 4-38
Table 4-5. Financial Ratios—Baseline and Post-compliance Equations 4-44
Table 4-6. Sample Results Showing Impact of Regulatory Options on Financial Performance
for a Single-family Residential Construction Model Firm, with 7.5-Acre Costs,
in the 10 to 24 Housing Units Starts Class 4-45
Table 4-7. Number of Firms in the C&D Industry, Adjusted for Regulatory Option Coverage . 4-49
Table 4-8. Number of Firms in the Construction and Development Industry Adjusted for State
Equivalency for the CGP Component of Option 2 and for Option 4 4-50
Table 4-9. New Single-Family and Multifamily Housing Units Authorized, 1995-1997 4-61
Table 4-10. Average and Median Lot Size for New Single-Family Housing Units Sold,
1995-1997 4-61
Table 4-11. Typical Building Sizes and Size Ranges by Type of Building 4-66
Table 4-12. National Estimates of Land Area Developed Per Year, Based on Building
Permit Data 4-67
Table 4-13. National Estimates of Land Area Developed Based on NRI Totals 4-68
Table 4-14. Distribution of Permits by Site Size 4-70
Table 4-15. Estimates of Acreage Affected Under Final Action Options 2 and 4 4-72
Table 4-16. Change in Housing Affordability—Sample Calculation 4-76
Table 5-1. Number of Acres Used to Calculate Per-Acre Costs 5-4
Table 5-2. Costs Per-Acre Over All Developed Acres 5-5
Table 5-3. Costs Per-Acre over CGP-Affected Acres 5-6
Table 5-4. Baseline Sales Price and Profit Conditions for the Model Projects 5-9
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Table Page
Table 5-5a. Impact of Regulatory Options on Model Project Financials—100 Percent Cost Passthrough,
Summarized Across All Project Sizes 5-11
Table 5-5b. Impact of Regulatory Options on Model Project Financials—Zero Percent
Cost Passtrough, Summarized Across All Project Sizes 5-11
Table 5-6. Baseline Financial Ratio Values 5-16
Table 5-7a. Impact of Regulatory Options on Model Firm Financial Performance (Zero Cost
Passthrough) 5-18
Table 5-7b. Impact of Regulatory Options on Model Firm Financial Performance (Estimated
Actual Cost Passthrough) 5-19
Table 5-8a. Estimated Numbers of Firms Expected To Experience Financial Stress (Zero Cost
Passthrough) 5-20
Table 5-8b. Estimated Number of Firms Expected To Experience Financial Stress ("Realistic"
Cost Passthrough Assumption) 5-20
Table 5-9a. Estimated Potential Employment Effects (Zero Cost Passthrough) 5-21
Table 5-9b. Estimated Potential Employment Effects ("Realistic" Cost Passthrough
Assumption) 5-22
Table 5-10. Barrier to Entry Analysis (Zero Cost Passthrough) 5-24
Table 5-11. Estimated Annual National Cost of Stormwater Control Options 5-26
Table 5-12. Calculation of Total Cost per Unit 5-28
Table 5-13. Impact of Option Compliance Costs on Housing Affordability 5-30
Table 5-14. Single-Family Residential—Changes in Price and Quantity From the Baseline .... 5-31
Table 5-15. Single-Family Residential Average RHOI by Census Division 5-33
Table 5-16. Single-Family Residential—Percentage Change in RHOI by Census Division 5-33
Table 5-17. Multifamily Residential—Changes in Price and Quantity From the Baseline 5-34
Table 5-18. Commercial—Changes in Price and Quantity From the Baseline 5-35
Table 5-19. Industrial—Changes in Price and Quantity From the Baseline 5-36
Table 5-20. Changes in Output and Total Employment From the Baseline 5-38
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Table Page
Table 5-21. Annual Changes in Social Welfare Measures—All Sectors Combined 5-40
Table 5-22. Changes in Output to the Construction Industry by State and Use Category Under
Option 2 5-42
Table 5-23. Net Change in Total Employment by State and Use Category (Jobs) Under
Option 2 5-44
Table 5-24. Costs To Establish Construction Programs 5-45
Table 6-1. SBA Small Business Definitions for the C&D Industry 6-6
Table 6-2. Number of In-Scope Establishments by Option in the C&D Industry 6-8
Table 6-3. Ratio of Businesses to Establishments by Employment Size Class 6-9
Table 6-4. Establishments by Employment Class and Revenues per Establishment 6-10
Table 6-5. Number of Establishments in the Single-Family and Multifamily Construction
Industries Sectors by Starts Class 6-12
Table 6-6. Estimated Number of Small Businesses Potentially Affected by the Options
Considered 6-13
Table 6-7. Estimate of Numbers of Small Firms in "Equivalent" and "Non-Equivalent" States . 6-14
Table 6-8. Key Model Facility Data by Housing Starts Classification Category 6-17
Table 6-9a. Estimated Number of Small Firms with Compliance Costs Exceeding 1 Percent
of Revenues—Zero Percent Cost Passthrough 6-24
Table 6-9b. Estimated Number of Small Firms with Compliance Costs Exceeding 3 Percent
of Revenues—Zero Percent Cost Passthrough 6-25
Table 6-9c. Estimated Number of Small Firms with Compliance Costs Exceeding 1 Percent
of Revenues—Estimated Actual Cost Passthrough 6-26
Table 6-9d. Estimated Number of Small Firms with Compliance Costs Exceeding 3 Percent
of Revenues—Estimated Actual Cost Passthrough 6-27
Table 7-1. Framework of Benefit Categories and Depth of Analysis 7-7
Table 7-2. Benefit Assessment Summary 7-8
Table 7-3. Benefit Assessment Summary—Differences from Baseline 7-9
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Table Page
Table 8-1. Social Costs and Benefits 8-5
Table 9-1 Impacts of Regulatory Option Compliance Costs on Government Units 9-4
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FIGURES
Figure Page
Figure 2-1. Number of Establishments in the C&D Industries, by State, in 1997 2-14
Figure 2-2. Seasonal Trends in Employment in the C&D Industry, 1997 2-16
Figure 2-3. New Privately Owned Housing Units Authorized by Building Permits in
Permit-Issuing Places: Annual Data 2-30
Figure 4-la. Industry-Level Analysis 4-7
Figure 4-lb. National-Level Analysis 4-8
Figure 4-2. Hypothetical Pre- and Post-regulatory Cumulative Distribution Function for Current
Current Ratio, SIC 1531: Operative Builders 4-52
Figure 4-3. Consumer Surplus Loss, Producer Surplus Loss, and Deadweight Loss 4-89
Figure 6-1 Baseline Distribution Functions for Facility Revenues 6-21
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ACRONYMS
BAT
Best Available Technology Economically Achievable
BCT
Best Conventional Pollutant Control Technology
BEA
Bureau of Economic Analysis
BMP
Best Management Practices
BOD
Biochemical Oxygen Demand
BPJ
Best Professional Judgment
BPT
Best Practicable Control Technology Currently Available
C&D
Construction and Development
C&D/FrMS
C&D Firm Model System
C&D/PEqMMS
C&D Partial Equilibrium Market Model System
C&D/PrMS
C&D Project Model System
CFR
Code of Federal Regulations
CGP
Construction General Permit
CWA
Clean Water Act
CWP
Center for Watershed Protection
D&B
Dun and Bradstreet
DO
Dissolved Oxygen
EA
Economic Analysis
ELG
Effluent Limitations Guidelines
ENRCCI
Engineering News-Record Construction Cost Index
EO
Executive Order
EPA
U.S. Environmental Protection Agency
ESCs
Erosion and Sediment Controls
FEC
Fecal Coliform Bacteria
FHWA
Federal Highway Administration
FRFA
Final Regulatory Flexibility Analysis
GDP
Gross Domestic Product
HOI
Housing Opportunity Index
I&C
Inspection and Certification Provisions
IRFA
Initial Regulatory Flexibility Analysis
MSA
Metropolitan Statistical Area
NAHB
National Association of Home Builders
NAHBHOI
NAHB Baseline Housing Opportunity Index
NAICS
North American Industry Classification System
NEPA
National Environmental Policy Act
NOI
Notice of Intent
NPDES
National Pollutant Discharge Elimination System
NRI
Natural Resources Inventory
NSPS
New Source Performance Standards
NWPCAM
National Water Pollution Control Assessment Model
O&M
Operating and Maintenance
OMB
Office of Management and Budget
POTWs
Publicly Owned Treatment Works
PSES
Pretreatment Standards for Existing Sources
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PSNS
Pretreatment Standards for New Sources
RFA
Regulatory Flexibility Act
RHOI
Rough Housing Opportunity Index
RIMS II
Regional Input-Output Modeling System
SIC
Standard Industrial Classification
SBA
United States Small Business Administration
SBREFA
Small Business Regulatory Enforcement Fairness Act
SWPPP
Stormwater Pollution Prevention Plan
TMDL
Total Maximum Daily Load
TON
Total Organic Nitrogen
TOP
Total Organic Phosphorus
TSS
Total Suspended Solids
UMRA
Unfunded Mandates Reform Act
USDA
U.S. Department of Agriculture
WQI6
Six-parameter Water Quality Index
Z'
Altaian's Z-score for the Manufacturing Sector
Z"
Altaian's Z-score for the Service Industry Sector
xviiiQ
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EXECUTIVE SUMMARY
ES.l INTRODUCTION
This economic analysis (EA) presents the U.S. Environmental Protection Agency's (EPA's)
evaluation of the incremental compliance costs and economic impacts of four options for controlling
discharges of stormwater during construction and development (C&D) activities. These options are
known as Option 1, Option 2, Option 3, and Option 4.
Option 1 requires enhanced inspection requirements and certifications of best
management practices (BMPs).
Option 2 comprises technology-based effluent limitations guidelines and standards (ELG)
for stormwater discharges from construction sites where 5 acres or more of land are
disturbed. It also includes enhanced inspection requirements and certification of BMPs.
Option 3 would not establish new regulations, but would instead continue to rely on the
existing National Pollutant Discharge Elimination System (NPDES) stormwater
regulations.
Option 4 is identical to Option 2 except that the inspection and certification requirements
are not included.
EPA has chosen Option 3 for the Final Action in this rulemaking process. This choice results in
no costs, no impacts, and no benefits to the C&D industry or the U. S. economy. This executive summary
acknowledges this choice, whereas the body of the EA presents the four options without reference to this
decision.
The C&D industry is currently regulated under NPDES permit requirements for construction
activities that disturb more than 1 acre. C&D activities in states where EPA is the permitting authority
are subject to EPA's Construction General Permit (CGP), which describes the permit requirements under
EPA's Phase I stormwater regulations (covering sites in which 5 or more acres of land are disturbed) and
Phase II regulations (covering sites in which 1 to 5 acres of land are disturbed). Delegated states are
authorized to issue NPDES permits and have their own permitting requirements. In many of these states,
ES-1
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the requirements are generally equivalent to the EPA CGP requirements. The analyses in this EA assume
that C&D activities are fully compliant with Phase I and Phase II storm water requirements. Therefore,
only the requirements of Options 1, 2 and 4 that are incremental to Phase I and Phase II stormwater
requirements are associated with costs, impacts, or benefits.
The Phase I and II rules require construction site operators to obtain permits to manage
construction site storm water runoff. The EPA CGP requires that construction site owners and operators
prepare a stormwater pollution prevention plan (SWPPP) and install a range of BMPs. Specifically, the
EPA CGP requires that sediment basins designed to control runoff from the 2-year, 24-hour storm or
3,600 cubic feet per acre be installed on drainage areas of 10 or more acres. For smaller sites, the EPA
CGP specifies that smaller sediment basins or sediment traps are to be used, or equivalent control
measures. The EPA CGP also requires that site owners and operators conduct periodic inspections of the
site, stabilize exposed soil areas, and conduct maintenance of BMPs. Many state general permits contain
similar provisions, although the specific design requirements vary.
Options 2 and 4 would have established the specific provisions of the EPA CGP as minimum
requirements for all construction sites nationwide. Option 2 would also have required a number of
enhanced site inspection and certification provisions. These provisions would have required inspections
of individual BMPs, as well as certifications when a number of specific activities (such as completing a
SWPPP, installing BMPs, and stabilizing exposed soils) have been completed. Option 1 would only have
required enhanced site inspections and certifications. Option 1 would have generally applied to all sites
with 1 or more acres of disturbed land, while Options 2 and 4 would have generally applied to all sites
with 5 or more acres of disturbed land.
The industries that would have been affected by the regulatory options include land subdivision
and development, single-family housing construction, multifamily housing construction, manufacturing
and industrial building construction, commercial and institutional building construction, and a variety of
heavy construction industries, such as highway construction, excavation contractors, and wrecking and
demolition contractors. EPA gathered information on these sectors from a variety of sources, including
the 1997 Census of Construction (the 2002 Census is not yet available). EPA believes the 1997 Census
provides a reasonable basis for characterizing the industries that could have been affected by the Final
Action. EPA also used the U.S. Department of Agriculture's Natural Resource Inventory to determine
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the amount of acreage disturbed annually, data collected from NPDES permits, and information collected
during focus group meetings held with representatives of the National Association of Home Builders
(NAHB). Other sources of data are discussed where data are presented.
EPA received 105 comments on the June 2002 proposal. Some of these comments focused on the
data EPA used to develop the economic analysis and, in some cases, commenters provided alternative
data. After EPA determined that alternative sources of data suggested by commenters were appropriate,
EPA integrated these new data into the economic analysis. Some commenters expressed concern about
sources of data but could not provide any alternatives. Where no alternative data were suggested, EPA
retained the existing data.
In addition to issues related to data, commenters expressed concern that impacts of this rule
would be too high, had a low cost-benefit ratio, or ignored certain segments of the industry. EPA
acknowledges that impacts would have occurred under Options 2 or 4, but does not provide conclusions
on the economic achievability of these options here and refers readers to EPA's document, Summary of
Public Comments with Responses Based on the Proposed Effluent Limitations Guidelines for
Construction and Development (Comment Response Document). A low cost-benefit ratio does not
preclude promulgating a rule. Additionally, EPA documented the reasons for excluding segments of the
industry from the analysis at proposal and in this EA.
Several commenters were confused by the presentation of the economic analyses. EPA has
substantially rewritten the EA to ensure greater clarity. Some commenters suggested changes to EPA's
methodology for analyzing impacts. In most cases, EPA determined that some changes were not
warranted. The Agency did change the assumed duration of single-family and multifamily projects.
Moreover, EPA now also assumes these projects are not cross-subsidized by other projects underway, as
suggested by commenters. EPA also received numerous comments on the elimination of post-
construction requirements. These requirements were removed from the draft proposal because the costs of
compliance were considered too high. These comments and all others are discussed in detail in EPA's
Comment Response Document.
The remainder of this Executive Summary addresses the industry profile (Section ES.2), the
regulatory options (Section ES.3), the economic impact methodology (Section ES.4), results of the
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economic analyses (Section ES.5), the results of the Final Regulatory Flexibility Analysis (Section ES.6),
a summary of the benefits (ES.7), the costs and benefits of the options considered (Section ES.8), and
information required under the Unfunded Mandates Reform Act (UMRA) (Section ES.9).
ES.2 PROFILE OF THE CONSTRUCTION & DEVELOPMENT INDUSTRY
Several characteristics of the C&D industry affect the structure of this EA:
Because individuals (e.g., homebuyers) are often the direct customers of the C&D
industry, it is necessary to address issues such as cost passthrough and the impacts of
regulations on housing affordability.
Developers and builders are engaged in complex and varying relationships, resulting in a
variety of different business models. Developers might undertake all site improvements
and sell completed lots directly to builders, act as builders themselves and remain onsite
to build out the development, or some combination of the two.
The C&D industry is dominated by small businesses. As a result, EPA must carefully
consider the impacts on small businesses in accordance with the requirements of the
Small Business Regulatory Enforcement Fairness Act (SBREFA).
C&D activities are highly localized, which suggests that a regional approach to analysis
is needed to account for varying market conditions.
The standard industry definitions include a large number of establishments primarily
engaged in remodeling activities and special trades (e.g., plumbing, electrical). These
establishments are less likely to be involved in land disturbing activities.
The C&D industry, as defined for this rule, is comprised of four main industry groups that will
further affect the structure of this analysis:
Land development and subdivision
Residential construction (including single-family and multifamily construction)
Nonresidential construction (including commercial and industrial construction)
Heavy construction
These four industry groups are most likely to engage in land disturbing activities.
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Land development and subdevelopment (categorized in the North American Industry
Classification System [NAICS] as NAICS 2331) accounted for 8,185 establishments, or 3.1 percent of all
establishments in the C&D industries. Heavy construction (NAICS 234) includes 42,557 establishments,
or 16.3 percent of the total. Of these, 27 percent are primarily highway and street construction
contractors; another 27 percent are contractors that work on water, sewer, pipeline, communications and
power line projects; and 43 percent are engaged in other types of heavy construction. Within the special
trades contractors subsector (NAICS 235), NAICS 23593 (excavation contractors) and 23594 (wrecking
and demolition contractors) together account for 19,771 establishments, or 7.6 percent of the C&D
industry total. Excavation contractors account for more than 90 percent of these establishments. The
number of establishments in the C&D industry total 261,617, although many of these will not be affected
by any of the options considered.
The C&D industry is dominated by small establishments—more than 87 percent of
establishments employ fewer than 20 employees. Two-thirds of the C&D establishments are organized as
corporations, with 25 percent organized as proprietorships. Only 9 percent are organized as partnerships
or some other legal form of organization. Geographically, the highest number of establishments per state
is found in California. Other states with large numbers of C&D establishments include Texas, Illinois,
Michigan, Ohio, Pennsylvania, New York, and Florida. International competitiveness is not an issue in
this industry, as construction activities are highly localized.
The C&D industry is estimated to employ nearly 2.4 million people with a payroll totaling $76.8
billion in 1997. More than half are employed in NAICS 233, except 2331 (building, developing, and
general contracting, except land subdivision and land development). The heavy construction sector
employs nearly 40 percent of the total. The industry employment figures confirm a highly seasonal
employment pattern.
The vast majority of firms in the C&D industry operate only one establishment. Most analyses in
this report assume that one firm is equivalent to one establishment. The number of small firms, based on
Small Business Administration (SBA) definitions, are estimated to comprise 99.5 percent of all firms in
the industry.
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Many of the establishments and firms in the C&D industry would have been unaffected by the
Final Action, regardless of option chosen, for several reasons. First, potentially affected establishments
are those that disturb land. EPA believes that establishments characterized as remodelers would not have
been affected regardless of option. Based on the 261,617 establishments estimated for the C&D
industries, and subtracting 62,400 remodelers, EPA estimates that 199,217 establishments could have
been affected. Options 2 and 4, however, exclude sites where less than 5 acres of land are disturbed.
EPA, therefore, assumes that builders of single-family housing making one to four or five to nine starts
per year would be unlikely to disturb that much acreage at a single site. Additionally, EPA assumes that
multifamily builders constructing two to nine housing units each year are also excluded from coverage
under these options on this basis. Finally, EPA also assumes special trade contractors (such as plumbers
and electricians) would be unlikely to disturb land and would not be the responsible party for NPDES
permitting purposes because they typically act as subcontractors. EPA's count of potentially affected
establishments under Options 2 or 4 is 114,170.
ES.3 DESCRIPTION OF THE REGULATORY OPTIONS
EPA is authorized under the Clean Water Act (CWA) to promulgate ELGs. Under this authority,
EPA considered Best Practicable Control Technology Currently Available (BPT), Best Available
Technology Economically Achievable (BAT), Best Conventional Pollutant Control Technology (BCT),
and New Source Performance Standards (NSPS) requirements.
EPA considered four regulatory options, of which two (Options 2 and 4) were designed to
implement ELGs. These four options were described in detail in Section ES.l.
ES.4 ECONOMIC IMPACT ANALYSIS METHODOLOGY
EPA has undertaken a wide range of impact analyses in this EA. Many of these multi-level,
economic analyses measure impacts that might be associated with options considered for this Final Action
from several perspectives (e.g., the builder or the consumer). Alternatively, in some cases, multiple
analyses are used to provide varied approaches for estimating similar impacts. EPA uses several
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models and modeling systems, discussed in the following sections, for measuring economic impacts. The
impacts analyzed are divided into two major groups: 1) impacts on the individual projects, establishments,
and firms in the construction industries, and 2) impacts at the national level and on the national economy.
EPA employs methods and models for economic analyses that are used daily in the marketplace
by business, government, and industry. For example, in estimating the economic impacts of costs of the
regulatory alternatives on businesses, EPA uses, among many others, formulas and methods similar to
those used by a mortgage banker to estimate the monthly mortgage on a new home. These formulas and
methods can be used to replicate the results in this economic analysis or to conduct independent analyses
of the impacts of the options considered in this document, or any other options.
EPA has made several assumptions to run the various models and modeling systems concerning
the ability of the construction industry to pass through costs to the retail market and consumers. These
assumptions vary depending on the analysis run by each model or modeling system. These assumptions
fall into three categories regarding cost passthrough scenarios:
The industry can pass through 100 percent of the costs of compliance. Analyses using
this type of assumption measure the worst-case impacts on consumers.
The industry can pass through none of the costs. This results in an analysis measuring
the worst-case impacts on the industry.
The industry can pass through some of the costs—a realistic cost passthrough assumption
based on market conditions. In this scenario, some costs fall on consumers, and some on
the industry. The types of cost passthrough assumptions used in each model or modeling
system are discussed in the following sections.
Before the specific impact methodologies and the models and modeling systems are discussed,
we summarize how the incremental compliance costs were calculated and applied in the economic impact
analysis. The remainder of this section discusses two levels of modeling used in the impact
analysis—industry level (two modeling systems) and national level (four major models/modeling
systems). This section also discusses the final calculation of total social costs.
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ES4.1 Use of Engineering Costs in the Impact Analyses
EPA's engineering cost analysis produced incremental costs in each state. Within each state,
EPA estimated costs for six site sizes and four major land-use types identified as potentially affected, for
a total of 24 subtotaled costs in each of the 50 states. The site sizes modeled used 0.5, 3, 7.5, 25, 70, and
200 acres (zero costs were assigned to the 0.5-acre sites for all options discussed in this EA). The land
use types included single-family housing, multifamily housing, commercial construction, and industrial
construction. The derivation of these costs can be found in EPA's Development Document for the
Effluent Guidelines for the Construction and Development Point Source Category (Technical
Development Document).
In most cases, EPA had insufficient data to model separate projects and firms for the 50 states in
the economic analysis. In response to insufficient data, EPA created weighted average costs per acre on a
national basis. For one of the market modeling approaches, however, EPA was able to use the state-by-
state data.
EPA developed four sets of cost inputs for the economic analyses based on the engineering costs.
One set used the total engineering costs of the inspection and certification requirements in Option 2,
calculated by site size and construction type, divided by all acres estimated to be disturbed annually (by
site size and land use type).
Another set used the total engineering cost of the CGP codification cost component in Options 2
and 4, also calculated by site size and land use type. These incremental costs were divided by the number
of acres estimated to be developed annually (by site size and land use type) in states whose stormwater
regulations were not considered to be equivalent to the CGP requirements. This approach created two
tiers of costs. Construction projects in most states face only the relatively low inspection and certification
costs, since the relevant state regulations match the CGP requirements (the "equivalent states").
Construction projects and firms in a few states, however, face the higher costs of meeting the inspection
and certification costs combined with the costs of meeting the CGP-based requirements in Option 2, or
the costs of meeting the CGP-based requirements in Option 4.
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A third set of costs used the total engineering costs of each option divided by the total estimated
number of acres disturbed annually to produce an overall national average cost per acre by site size and
industry type. Certain models were able to use the overall national average costs (e.g., the total
compliance cost model), but others used the costs per acre as adjusted by state equivalency determinations
to avoid, for example, underestimating impacts on individual firms in nonequivalent states.
The last set of costs used the state-by-state total engineering costs divided by the acres disturbed
in each state. EPA was able to run one market analysis at this level of detail.
ES4.2 Industry-Level Analyses
EPA developed two analyses at the industry level—an analysis of impacts on construction
projects and an analysis of impacts on construction firms. These analyses are conducted using two
modeling systems:
EPA's C&D Project Model System (C&D/PrMS), which measures impacts on
construction projects, including those on builder profits and house prices.
EPA's C&D Firm Model System (C&D/FrMS), which measures potential impacts on
firms (in terms of identifying changes in financial conditions associated with the options
that might lead to financial stress). It also identifies the number of employees that might
be affected at potentially financially stressed firms.
ES4.2.1 C&D Project Model System
EPA's C&D/PrMS is composed of a number of model C&D projects, each simulating the cash
flow of a C&D project for a certain site size and land use type. The matrix of six site sizes and four land
use types produce a total of 24 models. The cost inputs to the C&D/PrMS are the national average per-
acre costs by land use and project size. EPA uses these costs in this analysis because overall national
average changes in project financials are being calculated. When EPA inputs these costs into the
C&D/PrMS, the Agency can compute impacts at a wide variety of construction projects. For each type
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of construction project and site size, the average cost per acre for that project is input into a model that
simulates all of the costs of constructing that model project. The per-acre costs are multiplied by the
acreage associated with the site size (e.g., 7.5 acres is the acreage at a 7.5 acre site) to estimate a cost per
site. The increased cost then affects other cost items throughout a model project and can be measured as
either a change in the builder's asking price for a new house (assuming 100 percent cost passthrough to
consumers) or a change in the profitability of the project assuming the builder absorbs all incremental
costs (zero cost passthrough). The model also estimates multipliers that are used in other analyses. Using
the Opportunity and Interest Cost Multiplier, EPA can estimate the costs per acre, plus opportunity and
interest costs per acre (costs associated with self-financing or loans due to increased compliance costs).
Using the Total Cost Multiplier, EPA can estimate costs per acre, plus all additional components
(opportunity costs, interest costs, profit, and overhead) that contribute to the final asking price changes.
The former multiplier is particularly important for calculating the total costs of compliance, since the
costs represented by this multiplier must be included with the total engineering costs of compliance that
are estimated by the engineering cost models. The latter multiplier is important for estimating the total
impact on consumers and the economy as a whole.
ES4.2.2C&D Firm Model System
EPA's C&D/FrMS comprises a number of model C&D firms, each simulating the income
statement and balance sheet for a C&D firm of a certain size, measured as numbers of starts (or units) per
year and land use type. The cost inputs to the C&D/FrMS are the per-acre costs for the inspection and
certification cost components over all developed acres and the per-acre costs for the CGP cost
components over the developed acres in nonequivalent states. This approach allows EPA to better
estimate the number of firms that might experience financial stress, taking into account whether they are
located in a high-cost or low-cost state. The model system is run twice—once at the low cost per acre and
once at the high cost per acre. The impacts on firms in terms of numbers of firms estimated to experience
financial distress are then calculated based on the percentage of firms located in low cost states versus
those located in high cost states.
These costs are used by the C&D/FrMS to compute impacts at the level of the construction firm.
Costs per acre by site size are multiplied by the number of acres per construction start and the number of
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starts assumed for each model firm (by industry type) to estimate a compliance cost for each firm. Each of
the four types of firms (single-family, multifamily, commercial, and industrial construction firms) are
investigated. The firm costs are used in the C&D/FrMS to yield information on changes in firm-level
financial ratios.1 These changes are then used to determine numbers of firms that might experience
financial stress as a result of incremental option costs and numbers of employees at firms potentially
experiencing financial stress. These costs can also be compared to total and current assets of the model
firms to determine if a barrier to entry by new firms might be present. Later, these firm-level costs are
also used to determine impacts on small businesses.
The firm-level analysis uses two cost passthrough assumptions to gauge worst-case impacts (the
zero cost passthrough assumption) and realistic impacts (a market-based cost passthrough assumption).
ES.4.3 National-Level Analyses
The methodologies for most of the national-level analyses are divided into several types and are
implemented using a number of models and modeling systems:
The Total Compliance Cost Model estimates national compliance costs to industry.
The Consumer Impact Model analyzes impacts on consumers that are driven by the
potential for price increases for single-family homes.
The C&D Partial Equilibrium Market Model System (C&D/PEqMMS), which comprises
three modules, uses partial equilibrium market models to measure impacts in C&D
markets:
— Module 1 is the National Housing Market Module, which estimates changes in
prices and quantities in the housing sector markets.
— Module 2 is the Regional Market Model Module, which estimates changes in
prices and quantities in the non-housing sectors and also estimates the numbers
of households priced out of the housing market.
1 EPA could not use an Altaian's Z approach for assessing the interactions of these financial ratios to
determine financial stress for this EA. Altaian has developed ratio coefficients for the manufacturing (public and
private) and the service sectors only. These coefficients would not be valid for the C&D industries. See Chapter
Four for more information.
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— Module 3 is the Net Economic Impact Model, which estimates impacts on the
national economy as a whole, calculating changes in price and quantity in all
sectors and estimating the losses in output and employment.
The Government Impact Model, which estimates total costs to governments.
Generally these models and modeling systems use the national-level costs per acre, since they are
either computing national-level costs or are estimating changes in national-level markets. Other than the
simpler aggregated cost calculations, they use only the market-driven (realistic) cost passthrough
assumptions, since market-based impacts are being measured in most of these analyses. Selected outputs
of these models are then combined to calculate the total social costs associated with each option. The
models and modeling systems listed above are discussed in more detail in the following sections.
ES4.3.1 Total Compliance Cost Model
To compute the total compliance costs to industry, EPA uses the national average cost per acre
computed over all developed acres (by land use type and project size) adjusted by the opportunity and
interest cost multipliers calculated by the C&D/PrMS. These costs are multiplied by the total number of
acres estimated to be developed annually by project size and land use type. When these costs are
aggregated, EPA determines the total cost to the construction industry of each option under consideration.
EPA's Total Compliance Cost Model calculates costs by industry type, and the total cost or the total cost
by sector becomes an input to many of the remaining national-level analyses.
ES4.3.2 Consumer Impact Model
The Consumer Impact Model uses the national average cost per acre for each site size in the
single-family land use type divided by the number of lots per acre assumed. These costs are adjusted by
the Total Cost Multiplier calculated by the C&D/PrMS to judge the impact of the increase in residential
housing price on the median-priced home. The model calculates the change in income that would be
needed to qualify for a home mortgage at the new price and the number of households that no longer
qualify for a house at that price, assuming standard lending practices.
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ES4.3.3C&D Partial Equilibrium Market Modeling System
EPA undertakes an analysis of the national housing market as well as a regional-level analysis of
the markets for single-family, multifamily, commercial, and industrial construction using partial
equilibrium models of these markets. EPA also determines the net economic impacts in the overall U.S.
economy. These analyses are incorporated into three modules that make up EPA's C&D/PEqMMS. The
first module, the National Housing Model, uses the total costs for the single-family sector output by the
Total Compliance Cost Model. The Regional Market Modeling Module (the second of the
C&D/PEqMMS modules) uses the state-by-state compliance costs per acre for each sector. These two
components estimate output changes at the industry level. The last component of the C&D/PEqMMS is
the Net Economic Impact Model. This module is discussed in more detail in the following section.
ES4.3.4Net Economic Impact Model
Compliance costs have a ripple effect on the U.S. economy, resulting in both positive and
negative impacts on production and employment in various sectors, both within and outside of the
construction industries. The third module of the C&D/PEqMMS, the Net Economic Impact Model, uses
the results of the partial equilibrium models (expressed as changes in industry output), as described
above, and economic input-output multipliers developed by the Bureau of Economic Analysis. Where
EPA has calculated results on both the national-level and regional levels (housing sectors only), EPA uses
the national-level results, since the regional-level data are more limited in scope. Economic multipliers
indicate the degree to which declines in construction activity will have a ripple effect causing declines in
employment in the construction industry and declines in output and employment in other industries.
Meanwhile, other parts of the economy (e.g., suppliers of ESCs) gain output and employment. The
impacts of compliance are thus measured as both gains and losses in output and gains and losses in
employment across the national economy. These gains and losses generally balance each other, but some
overall loss to the national economy does occur. This loss is called the deadweight loss, which
contributes to the overall social cost of a regulation. The outputs of the Net Economic Impact Model are
the change in employment and output in the national economy and an estimate of the deadweight loss.
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ES4.3.5Government Impact Analysis
EPA estimates government impacts using costs that were derived separately from the costs
discussed in the previous section. EPA did not re-evaluate government administrative costs. They
remain the same as those shown at proposal. EPA developed government costs by estimating the costs
associated with establishing or modifying permitting programs to reflect the requirements of the options
considered as well as new or increased costs related to permit processing. EPA added to these costs an
estimate of costs to various levels of government of complying with the options under consideration
(governments at all levels undertake construction projects themselves). The total of the administrative
costs of permitting and other activities and the compliance costs estimated to apply to government are the
total costs to government.
ES.4.4 Estimate of Social Costs
The final analysis EPA performs with the cost inputs is estimating total social cost. The total
social costs are calculated by adding the total compliance costs to industry, the total costs to governments,
and the total deadweight loss, calculated as discussed.
ES.5 ECONOMIC IMPACT ANALYSIS RESULTS
Results are reported here only for Option 2, which has higher costs than Options 1 and 4. Option
3 results in no costs. Costs are reported in year 2002 dollars. Costs in the remainder of the Economic
Analysis are reported in year 2000 dollars.
ES5.1 Costs per Acre
Cost per acre for Option 2 range, in the "low cost" (equivalent) states, from $0 to $340,
depending on size of project and construction type. The highest cost per acre in the single-family
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housing sector is $259/acre. In the "high cost" (nonequivalent) states, costs range from $0-$921/acre.
The highest cost per acre in the single-family housing sector is $686/acre in nonequivalent states.
ES5.2 Impacts on Projects
Impacts on projects are calculated under a 100 percent cost passthrough assumption to measure
impacts on consumers and under a zero cost passthrough assumption to measure impacts on industry
profits. Under Option 2, the average percent change in project price from the buyer's perspective,
assuming all costs are passed through to the consumer, is at most 0.19 percent (in the single-family and
industrial land use projects). The assumption of zero cost passthrough results in an estimated maximum
decline in project profits of 1.67 percent in the single-family and industrial land use projects.
ES5.3 Impacts on Firms
The estimated number of firms expected to experience financial stress under Option 2 is
estimated to total 258 firms (0.3 percent of all firms), assuming no costs can be passed through to
consumers. Assuming a realistic cost passthrough, however, an estimated 31 firms (0 percent) are
expected to experience financial stress. Depending on passthrough assumptions, a total of 673 to 5,178
employees (0.0 to 0.4 percent of all employees in the affected industries) might be affected at the
financially stressed firms.
Compliance costs represent a maximum of 1.7 percent of the estimated assets at representative
firms. Based on this finding, EPA concludes that Option 2 would not have produced any barriers to
entry.
ES5.4 National Compliance Costs
The total national compliance costs of Option 2 in 2002 dollars is $583.9 million. On a per-unit
basis, this is $112 per house and no more than $0.04 per square foot in the other construction types under
Option 2. These numbers do not show the share of costs split between consumers and industry, however.
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ES5.5 Market Model Results
Using the Consumer Impact Model, EPA estimates that, under a realistic cost passthrough
assumption, buyers will need an additional $45 (2002 dollars) of income to qualify to purchase the
median-priced new house under Option 2. Assuming income is fixed, this would result in a decline in the
number of households that can afford the median-priced house of 0.09 percent.
Using the C&D/PEqMMS and market-based cost passthrough assumptions, EPA estimates that
under Option 2, the price change of a single-family residence is $65, resulting in a decline in number of
houses produced annually of 157 units. This is a total loss of output to the construction industry of $52.1
million.
EPA also uses the C&D/PEqMMS to determine impacts on regional markets. These markets are
measured in terms of a rough housing opportunity index, which measures the percentage of households in
a region that can afford the median-priced house in that region. Option 2 results in a maximum change in
this percentage of 0.23 percent in the East North Central Region.
The C&D/PEqMMS is also used to compute price, quantity and output changes for the
multifamily, commercial and industrial sectors. Option 2 results in a $75 increase per multifamily unit,
with 115 fewer units being built, for an overall output loss of $ 15.8 million. Commercial space price rises
by $0.06 per square foot, resulting in 509 fewer project starts and an output loss of $275.5 million.
Industrial space price rises by $0.08 per square foot, leading to 144 fewer project starts and an output loss
of $26.2 million.
ES5.6 Net Economic Impacts
Based on market modeling results discussed in the previous section, EPA computes the national-
level changes in output and employment using an input-output modeling approach. For Option 2, EPA
estimates that total output losses will be $369.6 million (2002 dollars) and the net change in employment
will be 2,552 jobs lost. Total deadweight losses to the economy associated with the changes in social
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welfare (consumer welfare losses that are not transfers to producer welfare) are estimated to be
approximately $1 million under Option 2.
When broken down on a state basis, output losses range from $0 among several states to $31.5
million in Michigan. Only 14 states would have lost more than $10 million in output under Option 2.
ES5.7 Impacts on Governments
EPA estimates that Option 2 would have resulted in an additional $0.3 million cost to
governmental units for establishing new permit requirements. Of the total aggregate costs of compliance,
24.7 percent, or $144.2 million (2002 dollars), would have ultimately fallen on governments that
undertake their own construction projects.
ES5.8 Additional Impacts
EPA's Final Action to not establish new regulations does not have any costs or benefits.
However, since the regulatory options considered could be defined as a significant regulatory action
under Executive Order 12866, EPA has provided a cost-benefit chapter to address the requirements of
this Executive Order.
EPA estimates the Final Action will not disproportionately affect minority or low-income
populations, nor will it have disproportionately high human health or environmental effects, It also will
not have a significant effect on children's health. This finding would also have been true for Options 1, 2,
and 4.
ES.6 FINAL REGULATORY FLEXIBILITY ANALYSIS
The final regulatory flexibility analysis (FRFA) requires several issues to be addressed: 1) the
need for the regulation, 2) issues raised by public comments, 3) steps used to minimize impacts on small
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entities, 4) an estimate of numbers and types of small entities affected, and 5) a description of reporting,
record keeping, and other compliance requirements.
EPA is authorized to promulgate effluent guidelines and standards under the Clean Water Act.
EPA can choose to regulate or not to regulate discharge of pollutants from the C&D industry pursuant to
a consent decree in NRDC et al. V. Reilly (D.D.C. No. 8902980, January 31, 1992). As such, EPA is able
to consider either promulgating effluent guidelines or determining that no action is necessary.
Significant issues raised in comment include concerns that the smallest firms would be greatly
affected. EPA disagrees because none of the options considered will affect firms that disturb less than 5
acres of land. These firms tend to be the smallest firms in the affected industries. Some commenters
believe that EPA did not present the SBREFA Panel conclusions and descriptions of outreach and that no
impact results for small business were presented. EPA disagrees. The SBREFA Panel conclusions and
descriptions of outreach are provided in the rulemaking record, and Section 6.4 of the EA for the proposal
presents the small business impact analysis. A few commenters disagreed with EPA's use of housing
starts cutoffs as a proxy for the number of acres disturbed to eliminate builders from the count of affected
firms. EPA continues to believe these cutoffs are pertinent and has not systematically underestimated the
numbers of small businesses affected. One commenter suggested EPA only consider sites greater than 5
acres. EPA's Final Action will not affect sites of any size.
EPA took several steps to minimize impacts in each of the options considered. Option 2 is
designed to minimize impacts on small business by only covering sites where 5 acres of land or more are
disturbed. By designing Option 2 to codify the CGP, EPA designed an option that is similar to the
provisions in most states' regulations, leaving few firms potentially affected by incremental requirements.
Option 4 further reduces impacts on small business by eliminating the inspection and certification
requirements. Option 3, EPA's selected option, which continues the implementation of the existing
NPDES regulations, imposes no incremental requirements on any firms.
EPA used SBA definitions of small firms and identified the number of small firms using
distributions of numbers of establishments by revenue size classes, using the assumption that number of
establishments are equivalent to numbers of firms based on ratios of numbers of establishments to firms
in the key industries. Based on this approach, EPA estimates that 69,970 small firms would have been
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potentially affected by either Option 2 or Option 4, of which only 18,554 are located in states considered
to be nonequivalent states (that is, they will face the higher CGP codification cost components). This is
only about 27 percent of all small firms that would have been potentially affected by either Option 2 or 4.
The majority of these firms are in the commercial and institutional building construction industry (59
percent), with only 15 percent each in the single-family housing sector and heavy construction sector, 10
percent in the industrial construction sector, and 2 percent in the multifamily housing sector.
Option 2 contains record keeping and reporting requirements for entities in the C&D industry.
The maintenance of a site log is a significant record keeping and reporting requirement. EPA estimates
that maintaining site logs would have entailed 8.7 hours of labor annually at an average annual cost of
$335 for each firm. Some states would also have incurred some costs related to implementing Option 2 or
4. EPA estimates approximately 200 hours per state would be required to implement these options.
EPA also undertook an analysis of small business impacts. The analysis relies on the C&D/FrMS
using a subset of the model firms that represent firms making fewer than 500 starts per year. EPA uses
the standard revenue test methodology for identifying impacts on small firms and develops revenue
distributions to allow for a range of revenues that might be possible at the modeled small firms. This
approach provides EPA with low and high estimates of potential impact. The impacts are calculated
based both on zero cost passthrough (the worst-case analysis) and market-based "realistic" cost
passthrough. In the worst-case analysis, the maximum number of small firms with costs exceeding 1
percent of revenues under Option 2 is estimated to be 1,884, or 1.4 percent of all small firms. Under the
realistic cost passthrough assumption, the maximum number of small firms with costs exceeding 1
percent of revenues is estimated to be 231, or 0.2 percent of all small firms.
ES.7 BENEFITS
EPA modeled stormwater discharges from construction sites to estimate the change in sediment
reaching waterways as a result of implementing Option 4. EPA created separate models for each state,
ecoregion, and soil type combination. The models indicated Option 4 would reduce sediment loads by
0.8 million metric tons each year. This change was input to National Water Pollution Control Assessment
Model (NWPCAM), which is a national surface-water quality model that simulates water quality
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improvements and economic benefits that result from water pollution control policies. NWPCAM
incorporates a water quality model and monetary benefits estimation routine to conduct national policy
simulations.
NWPCAM simulations indicated that total suspended sediment would be reduced in 9,303 stream
miles as a result of Option 4. Total suspended sediment is one element of a six-parameter water quality
index. EPA relates changes in the water quality index to household willingness to pay for changes in
water quality derived from a 1993 survey by Carson and Mitchell. EPA estimates that the public would
have been willing to pay $15.2 million (2002 dollars) for the water quality changes that would have
resulted from Option 4. An alternative analysis based on a water quality ladder interpretation of the
Carson-Mitchell survey estimated a public willingness to pay of $28.4 million.
In addition to the benefits estimated by NWPCAM, the regulation would have generated
additional benefits that could not be easily quantified. EPA's Final Action does not generate any benefits
or costs.
ES.8 COSTS AND BENEFITS OF THE REGULATORY OPTIONS
EPA is required under Executive Order 12866 to perform a cost-benefit analysis of a major rule,
which is one in which costs to all parties exceed $100 million per year. Because Options 2 or 4 might
have costs exceeding $100 million per year, EPA undertook a cost-benefit analysis. EPA first estimated
the total social costs of the options by adding the total compliance costs to industry, the costs to
government agencies and the deadweight losses to society. Option 2 is expected to result in total social
costs of $585.2 million per year. As discussed in Section ES.7, the total benefit of Option 2 is at least
$15.2 million per year. Option 4 results in total social costs of $379.1 million per year and realizes
benefits of $15.2 million per year. Option 3, the no-action option, results in no costs and no benefits.
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ES.9 UNFUNDED MANDATES REFORM ACT
EPA is required to determine impacts of federal mandates that might result in expenditures to
state, local, and tribal governments, in the aggregate, or to the private sector, of $ 100 million or more in
any one year. The preceding analyses provide impact results on the private sector. EPA estimates
impacts on governments here.
Had Option 2 or 4 been chosen, EPA estimates that governments would have incurred costs
totaling $144.2 million or $93.4 million per year (2002 dollars), respectively. EPA compared local
government share of compliance costs against several financial indicators to determine impacts on small
governmental units (since they are the most sensitive to the costs imposed by the regulatory options). The
indicators used were total revenues, capital outlay, and capital outlay for construction only. In all cases,
compliance costs were less than 0.21 percent of any one of the financial measures, indicating no
significant impacts on even the smallest governmental units from either Option 2 or 4.
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CHAPTER ONE
INTRODUCTION
The U.S. Environmental Protection Agency (EPA) has considered four regulatory options to
address stormwater discharges from active construction sites. For Option 1, EPA considered enhanced
inspection and BMP certification requirements, with other permit requirements based on BPJ, for sites
where one acre of land or more is disturbed. For Option 2, EPA considered technology-based effluent
limitation guidelines and standards (ELGs) for stormwater discharges from construction sites where 5
acres or more of land are disturbed. This option also included enhanced inspection requirements and
certification of Best Management Practices (BMPs). As another option (Option 3), rather than
establishing ELGs, EPA considered allowing technology-based permit requirements to rely on the
existing National Pollution Stormwater Discharge Elimination System (NPDES). This is referred to as
EPA's no-action option. As a last option (Option 4), EPA considered the Option 2 ELGs, but eliminated
the enhanced inspection and BMP certification requirements.
The deposition of sediment discharged from construction sites contributes to the loss of capacity
in small streams, lakes, and reservoirs. Mitigation efforts are required to repair loss of stream capacity and
include dredging or replacement. The options requiring establishment of ELGs or inspection and
certification procedures could significantly reduce the amount of sediment discharged from active
construction sites. The Preamble to the Final Action discusses EPA's decision among instituting an ELG
covering construction and development activities, requiring inspection and certification procedures, and
allowing permits based on BPJ. This report provides the economic information EPA used to make the
decision on which action to undertake.
This EA presents EPA's analysis of the incremental compliance costs and the economic impacts
of the final options. The EA details the options that the Agency considered for the Final Action. The
report covers financial impacts to establishments in the construction and development (C&D) industry,
potential impacts on consumers, and market and secondary impacts on the national economy, such as
employment and output. The EA also presents small business analyses to comply with the Regulatory
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Flexibility Act (RFA) as amended by the Small Business Regulatory Enforcement Fairness Act
(SBREFA). It includes cost-benefit analyses required under Executive Order 12866 and the Unfunded
Mandates Reform Act (UMRA). Additionally, the EA presents information on environmental justice and
children's health.
This chapter begins with a discussion of the current regulatory environment in the C&D industry.
Section 1.1 provides background useful for understanding the regulatory baseline for the C&D economic
analysis. To determine the baseline, EPA assumed 100 percent compliance with the Phase I and Phase II
stormwater requirements and applicable state regulations. EPA also used the Development Document for
the Effluent Guidelines for the Construction and Development Point Source Category (Technical
Development Document) (U.S. EPA, 2004a) to identify states that have requirements equivalent to EPA's
regulatory options.
Chapter One includes five additional sections. Section 1.2 presents EPA's reasons for
considering the ELG and the inspection and certification provisions, as well as the "no-rule" option for the
final decision. Section 1.3 identifies the potentially affected sectors of the C&D industry. Section 1.4
provides an overview of key data sources used in the development of this EA. Section 1.5 discusses some
of the major comments received on the EA for the proposal, and Section 1.6 provides an outline for the
remainder of this report.
1.1 EXISTING REGULATORY FRAMEWORK
The Federal Water Pollution Control Act, also known as the Clean Water Act (CWA), was passed
by Congress in 1972 to "restore and maintain the chemical, physical, and biological integrity of the
nation's waters" (33 U.S.C. § 1251 (a)), sometimes referred to as "fishable, swimmable" criteria. The
CWA establishes a comprehensive program for protecting our nation's waters. Among its core
provisions, the CWA prohibits discharging pollutants from a point source to waters of the United States
without a NPDES permit. Under Title III, the CWA also provides for the development of technology-
based effluent limitations that are imposed through the NPDES permit framework to control direct
discharges of pollutants.
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The CWA was amended in 1987 to provide for implementation of a comprehensive national
program for addressing municipal and industrial stormwater discharges (Water Quality Act of 1987, Pub.
L. 100-4, February 4, 1987). Section 402(p) of the CWA requires that industrial, municipal, and other
stormwater dischargers designated by EPA obtain NPDES permits. In response to these amendments,
EPA has promulgated two rules that contain provisions affecting the C&D industry. These regulations,
commonly referred to as the Phase I (55 FR 47990) and Phase II (64 FR 68722) stormwater rules, require
NPDES permits for construction activities disturbing more than 1 acre and discharging stormwater.
Phase I was promulgated on November 16, 1990, with permit requirements taking effect in 1992. Phase
II was promulgated on December 22, 1999, with permit requirements taking effect in March 2003.
The C&D industry is currently regulated under NPDES permit requirements for construction
activities disturbing more than 1 acre. Construction activities disturbing 5 acres or more are covered
under the Phase I requirements while construction activities disturbing between 1 acre and 5 acres are
covered under the Phase II requirements. Phase II requirements took effect on March 10, 2003.
The Phase II requirements for the C&D industry are implemented through the NPDES program.
The implementation tool is either EPA's Construction General Permit (CGP) in states without their own
authorized NPDES program or a permit issued by a state that is authorized as a NPDES permit
administrator. The national CGP issued by EPA applies in those areas where EPA Regions 1, 2, 3, 5, 6,
7, 8, 9 and 10 are the NPDES permitting authorities. (The CGP recently became available in EPA Region
6.) EPA Region 4 has their own version of the CGP, which applies only in those areas where the
respective Region is the NPDES permitting authority. Permits required by NPDES programs can also be
issued through one of EPA's ten regions (as described above) or through an authorized state/territory
NPDES permitting authority. At this time, 44 states have NPDES permitting authority.2 EPA also issues
stormwater permits in nondelegated states, on tribal lands, and in most territories.
2 With the exception of Alaska, Arizona, the District of Columbia, Idaho, Massachusetts, New Hampshire,
and New Mexico, all states have some level of NPDES permitting authority. Even in states with NPDES
permitting authority, EPA could be responsible for issuing permits for activities conducted at federal facilities
and/or on tribal lands.
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EPA's CGP was initially issued in 1992 to cover the Phase I requirements and, because permits
must be renewed every five years, was renewed in 1998. These permits covered only construction
activities on sites larger than 5 acres. The 1998 permit was renewed in July 2003. This revision of the
CGP incorporates the small construction activity permitting requirements of the Phase II rule, which
covers sites from 1 to 5 acres. It requires permittees (including the newly affected builders and developers
of the smaller Phase II sites) to prepare a stormwater pollution prevention plan (SWPPP) for C&D
activities. The permit lists options and goals for other erosion and sediment controls (ESCs), and the
SWPPP must contain a description of any ESCs used, but there are no required elements.3 Options and
goals for post-construction BMPs are also contained in the CGP, but none are specifically required. As
with ESCs, those BMPs selected for use, if any, must be described in the SWPPP. The new CGP also
continues to apply to the original Phase I activities (those disturbing 5 acres of land or more). The
national CGP and the general permits currently used by NPDES permitting authorities are intended to be
used as templates for the small construction permits.
The Phase II regulations also provide waivers for construction activities disturbing between 1 and
5 acres of land in instances where:
Activity occurs during a negligible rainfall period (rainfall erosivity factor of less than
five), or
A Total Maximum Daily Load (TMDL) or equivalent analysis addresses the pollutants of
concern, leading to a determination that stormwater controls are not necessary for
construction activity. (64 FR 68735).
These waivers acknowledge that variance in regional factors, such as climate, annual rainfall patterns, and
existing hydrology, affect the incidence and magnitude of stormwater runoff.
EPA has encountered some difficulties in implementing Phase II. First, one portion of the rule
was remanded. The remanded portion applies to municipal separate storm sewer systems (MS4s), but not
to construction. Additionally, EPA has postponed the permit application date for oil and gas
3 For sites with 10 acres or more of disturbed area, the CGP does require installation of temporary sediment
basins.
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construction activity that disturbs 1 to 5 acres (i.e., sites covered under the Phase II rule) until March 10,
2005. All other provisions of the Phase II requirements have been implemented under the current CGP.
This fact leads to EPA's baseline assumption that Phase II, as it applies to the C&D activities applicable
to the regulatory options under consideration, is fully in effect.
1.2 PURPOSE OF THE REGULATORY OPTIONS
The existing NPDES stormwater regulations require construction site operators to manage
construction site runoff, but do not require any specific level of control. Two of the options under
consideration (Options 2 and 4) are designed to establish ELGs in the form of minimum standards for
design and implementation of erosion and sediment controls used during the active phase of construction.
Existing compliance determination practices for construction site stormwater controls rely
principally on site inspections by local governments. Enforcement efforts are reported to be uneven
nationwide, largely due to limited enforcement resources at the federal, state and local levels. Option 1 is
designed to establish site inspection and certification requirements, but without the ESC standards. Option
2 (but not Option 4) also establishes minimum requirements for conducting site inspections and providing
certification as to the design and completion of various aspects of those controls. These requirements
could strengthen the current permit program.
1.3 INDUSTRIES POTENTIALLY AFFECTED BY THE REGULATORY OPTIONS
This report focuses on the major C&D industries potentially affected by the options considered
by EPA. Table 1-1 identifies these industries according to both their North American Industry
Classification System (NAICS) and Standard Industrial Classification (SIC) codes.4 A detailed
description of these C&D industries can be found in Chapter Two of this report.
4 The NAICS system recently replaced the SIC system.
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Table 1-1. Industries Potentially Affected by the Regulatory Options
North American Industry
Standard Industrial
Classification System Code
Classification Codes
Regulated Entities
(NAICS)
(SIC)a
Land subdivision and
development
23311
6552
Single-family housing
construction
23321
1521, 1531, 8741
Multifamily housing construction
23322
1522, 1531, 8741
Manufacturing and industrial
building construction
23331
1531, 1541, 8741
Commercial and institutional
building construction
23332
1522, 1531, 1541, 1542, 8741
Highway and street construction
23411
1611,8741
Bridge and tunnel construction
23412
1622, 8741
Water, sewer, and pipeline
23491
1623, 8741
construction
Power and communication
23492
1623, 8741
transmission line construction
Excavation contractors
23593
1794
Wrecking and demolition
contractors
23594
1795
" Some parts of the SIC Industries are included in other NAICs industry classifications.
Source: U.S. Census Bureau 1997 Census of Construction
1.4 OVERVIEW OF KEY DATA SOURCES
A common data source used to support the development of many past ELGs is the CWA section
308 industry survey. For this rulemaking process, however, EPA determined that such a survey should
not be undertaken. This decision led to the use of existing data sources, including academic literature,
industry trade associations, and government data, such as that provided by the U.S. Census Bureau.
Major data sources are discussed in more detail where they are used to support sections of this analysis.
This section provides an overview of several key sources and their importance to the economic analysis of
the proposed C&D ELG.
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Of primary importance in the development of this EA were the 1992 and 1997 results of the
Census of Construction, conducted by the U.S. Census Bureau every five years. The census provided
information on the industry sectors potentially affected by the proposed rule, as well as characteristics of
each sector, such as employment and revenue levels. Questionnaires for the 2002 Census of Construction
were mailed in December 2002. Responses were due by February 12, 2003, but many extensions of time
to file were granted. Once they are received, responses are coded and checked before the data are
released. The Census Bureau will not release data until they are thoroughly reviewed and consistent. The
Bureau has not yet scheduled a date for release of Census of Construction data but expects to release
information in 2004 and 2005. EPA does not have access to the new census data for this EA.
EPA used several other reports from the Census Bureau that are updated more frequently than
the Census of Construction, including:5
Report C20 - Housing Starts
Report C25 - Characteristics of New Housing
Report C30 - Value Put in Place
Report C40 - Building Permits
All of these reports contributed to the various economic models developed for this EA.
The U.S. Department of Agriculture's (USDA's) Natural Resources Inventory (NRI) was used to
determine the amount of disturbed acreage caused by urbanization and new development. This
information was important to the environmental assessment, the benefits assessment, and as a way to
determine the rate of new development.
EPA also used data collected from permits issued by existing NPDES permitting authorities.
Currently, regulation of C&D activity is triggered when a builder/developer files a notice of intent (NOI)
with the permitting authority. Permitting authorities record these NOIs in order to track development
5 These reports are available at the following web address: http://www.census.gov/const/www/.
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within their jurisdiction. EPA obtained copies ofNOI databases for NPDES-approved states and for
those non-authorized states where EPA acts as the NPDES permitting authority.6 The databases
contained a wide variety of information, such as total site size, disturbed acreage, project type (e.g.,
residential, nonresidential), and project ownership status (public or private). EPA planned to use this
information to estimate the number of stormwater starts. The databases, however, lacked the level of
detail EPA wanted to generate reliable estimates. In addition, inconsistencies in the type of data collected
and coverage made it difficult to compare the databases with one another. Although EPA could not use
these databases in the manner hoped, they were useful for generating rough estimates of the number of
permits issued nationwide, as a check on the permit estimates reported by the Census Bureau. EPA did
not conduct further analysis on these databases prior to a final decision on the action concerning a C&D
ELG.
An additional source of information for the development of the economic analysis (described in
Section 4.2) was a series of focus groups held with representatives of the National Association of Home
Builders (NAHB). These focus groups helped EPA understand the process of construction project
development and provided estimates of data elements most helpful in building economic models. These
estimates were used when no other national-level data from other sources (such as the Census Bureau)
were available. EPA continues to rely on some of these data where no alternative data are available.
Some of the data and methodologies used in the Phase II EA were also used in this rulemaking
effort. These sources and methods are described in detail in Chapters Four, Five, and Six.
EPA received several comments on the sources of data used in the EA. Two comments were of
special note. First, the Multi Housing Council and the National Apartment Council commented on EPA's
solicitation of data on the financial conditions of multifamily builders and developers. They provided
alternative assumptions about the length of time to complete a project and financing (i.e., whether these
projects are financed separately from related projects by the same firms). EPA reviewed the information
provided and found it valid for use in modeling multifamily projects. Chapter Four discusses these
changes in more detail. Second, NAHB had similar issues with EPA's assumptions about single-family
projects, stating that they are of longer duration and are rarely cross-subsidized by other ongoing projects
6 NPDES permits are fully administered by EPA in six states plus Washington, DC. In other states, EPA
acts as the permitting authority for activities only on Indian and/or federal lands.
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in the same firm. NAHB also questioned the validity of the focus group data. EPA reviewed the data that
NAHB collected and their data collection techniques. Although the survey response rate was extremely
low (less than 20 percent) and other aspects of the survey design could not be assessed, EPA has adopted
some of the results in its analysis. More information can be found in Chapter Four.
Note that other key comments on the economic analysis are discussed where they are relevant in
the report, along with summaries of EPA's responses. The complete comments with EPA's responses can
be found in the Summary of Public Comments with Responses Based on the Proposed Effluent
Limitations Guidelines for Construction and Development (U.S. EPA, 2004b) (Response to Comments
Document).
1.5 MAJOR COMMENTS ON THE ECONOMIC ANALYSIS FOR THE PROPOSAL
EPA received numerous comments on the proposal, some of which pertain to the economic
and/or the benefit-cost analyses. Some of the more significant comments, either due to the number of
comments received or their impact on EPA's decision to modify certain analyses for the final action, are
discussed below. Other comments that indirectly relate to the economic analysis, such as comments on
EPA's cost analysis and comments on individual benefits categories, are not considered direct comments
on EPA's economic analysis. Comments in these areas can be found in EPA's Response to Comments
Document. For the most part, those comments not summarized here are discussed as they become relevant
to the discussion in this EA. Detailed responses to all economics comments, including the ones
summarized below, can be found in EPA's Response to Comments Document.
Many of the commenters on the economic analysis were concerned that the economic impacts on
the industry, consumers, or the housing market itself would be too high if Options 1 or 2 were selected.
EPA acknowledges that Options 1 or 2 could result in some impacts, but does not judge the economic
achievability of these options in this report. See the Response to Comments Document.
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Many commenters were concerned that EPA was proposing options (Options 1 and 2) that had a
low benefit-cost ratio and felt EPA should not promulgate a rule where the costs outweighed the benefits
to such an extent. EPA notes that the CWA does not require EPA to consider a strict comparison of the
costs and benefits of an effluent guideline. Although EPA does consider the costs and benefits of the
options in deciding which action to take, it does not solely rely on cost/benefit ratios in choosing an
option for the Final Action. See EPA's Federal Register Notice for EPA's choice of option for the Final
Action and reasoning behind that choice. EPA also notes, however, that costs are relatively easy to
quantify, while benefits can be very difficult to quantify, and it may be even more difficult to assign a
dollar value to them. The Agency continues to work on developing methodologies that could allow more
accurate quantification of benefits in future rulemakings.
A few commenters were concerned that EPA had ignored a large segment of small
operations-those constructing one to four houses per year, or those primarily involved with remodeling.
EPA emphasizes that those building one to four houses per year or those primarily involved with
remodeling are unlikely to disturb an acre of land or more. Some commenters seemed confused by the
difference between total land developed and disturbed acreage. The disturbed acreage will generally be
much less than the total acreage developed. Those who build one to four houses per year generally build
one house at a time and often on nonadjacent lots. Even if they build four houses as part of one
development, the construction of four houses is unlikely to disturb an entire acre. This is also true of firms
primarily in the remodeling industry. EPA continues to believe that the assumption that remodeling
operations and those constructing one to four houses per year will not disturb 1 acre of land or more at
any one time is a valid one for the economic analyses.
Additionally, one commenter noted that EPA's analysis did not include firms with no employees.
These firms do all of their construction work through subcontractors. The commenter pointed out that
EPA's analysis does not account for impacts on subcontractors. EPA agrees that firms without employees
could trigger compliance costs. Unfortunately, there are very little data available to characterize the
impact of the regulation on such firms. EPA's analysis shows that, generally, these firms are very small,
and their revenues generally fall in a range that is unlikely to be associated with the amount of work that
would result in the disturbance of an acre or more of land. A few such firms, however, might have
revenues in the ranges typically seen for firms that EPA does consider affected. Such firms could be
characterized by the volume of business they do rather than their number of employees and, therefore,
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might resemble firms EPA has analyzed. EPA assumes firms with no employees, doing a similar amount
of business (measured as revenues) as those modeled in the analysis, will exhibit similar impacts and the
percentage of firm impacts will not change.
Impacts on subcontractors were also raised as an issue by the same commenter. EPA believes
that most additional costs to the subcontractor would be passed to the developer (since all potential
subcontractors will take into account the additional work needed to meet requirements and submit bids
reflecting this additional work). Even if this assumption is not true, costs would be shared between
several subcontractors, limiting impacts further.
The same commenter was concerned that, because firms with no employees were not included in
the count of firms, EPA had underestimated costs of compliance. EPA did not use a count of firms to
estimate costs. Costs were estimated by multiplying the costs of compliance on a per-acre basis by the
number of estimated acres disturbed in each type of construction activity (single family, multifamily,
commercial, and industrial).
EPA received substantial, detailed comments from NAHB. A key source of confusion was the
fact that numbers appearing in Chapter Four of the proposal EA were only examples to demonstrate how
the methodology worked, rather than actual results. Tables in Chapter Five show the numbers used in the
models to produce the actual reported results. Additional points of confusion are addressed in the
Response to Comments Document. EPA has made substantial efforts to identify portions of the EA that
NAHB found confusing and to ensure that these portions are clearer to the uninitiated reader. Chapter
Four now clearly identifies which numbers are being used as examples only and indicates that similar
numbers in Chapter Five are the actual numbers used in the analysis to produce the results seen.
Additionally, EPA has substantially rewritten both Chapters Four and Five to make them clearer to the
uninitiated reader.
As noted in Section 1.4, NAHB, the National Multi Housing Council, and the National
Apartment Association commented on certain specific methodological issues and provided alternative
data to replace assumptions on duration of projects, timing of expenditures (believing certain
expenditures should be assumed to occur in the first year), and financial independence of individual
projects from other projects a firm could have underway. EPA reviewed the information and, although it
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had some reservations, concluded that the information provided or referenced by the associations
provided valid assumptions for the modeling. Thus, EPA now considers single-family and multifamily
projects to be independent projects (not cross-subsidized by other projects) and has set the duration of
single-family projects to four years and multifamily projects to nine years. EPA, however, has not
changed timing assumptions. As it did at proposal, EPA assumes that all costs are incurred in the first
year of a project. This assumption tends to overstate costs to the extent that costs are incurred later in a
project, but only to a very small degree (see Chapter Four).
NAHB commented that the data derived from the focus groups was anecdotal and suggested that
EPA should have done a survey. EPA agrees that the data is anecdotal, but some of these focus group
data are now augmented by data submitted by NAHB. The remaining data, although anecdotal, is still the
only information available. Furthermore, the focus groups were attended by many of NAHB's own
members, who are highly respected for their knowledge of the industry and who have every motivation to
provide reasonable, if not fairly conservative, assumptions about their industry. NAHB was also
concerned by EPA's use of a 14-community study to determine the portion of land disturbed, saying the
sample was too small to provide useful data. The commenter did not, however, provide alternative data.
EPA did not perform a section 308 survey, which would have been the only alternative to using the focus
group and 14-community data. EPA, however, balances the burden to respondents with the additional
benefits of more precise data. Many effluent guidelines in the past have forgone section 308 surveys and
have been supported by similar types of information from focus groups and/or trade associations. In
addition, many analyses have relied on assistance from these types of groups in the development of model
facilities. EPA must sometimes rely on less than ideal data for decisionmaking purposes. EPA has done
the best job it could with less than perfect data and has followed a reasonable approach in the use of that
data.
EPA received numerous comments on the elimination of post-construction requirements, both for
and against. Those against dropping the post-construction requirements suggest that EPA found them
economically achievable and that the benefits significantly outweighed the costs. EPA reiterates that the
Agency never proposed controls on post-construction discharges and did not seek comment on such
measures. EPA discusses the reasons for the elimination of post-construction requirements in the
Preamble to the proposal.
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NAHB seemed confused by the purpose of EPA's various cost passthrough analyses. The
organization did not seem to understand that the zero cost passthrough and the 100 percent cost
passthrough analyses are alternative bounding analyses. NAHB was concerned that EPA had ignored
impacts on consumers in the zero cost passthrough analysis and ignored industry in the 100 percent cost
passthrough analysis. The analysis that EPA uses to assess the impacts on both industry and consumers
simultaneously is the market analysis, which predicts a high proportion of cost passthrough, but not 100
percent. The other two analyses were undertaken only to determine the maximum possible impact on
industry and consumers separately. EPA received no other comments on the ability of the C&D industry
to pass through a large portion of costs or that raised issues with EPA's use of three cost passthrough
assumptions (zero, 100 percent, and a market-based percentage).
One commenter thought EPA should clarify the baseline from which impacts are measured. EPA
has provided a discussion of the baseline assumptions in Section 1.2 and Chapter Four, Section 4.1.1.
One commenter noted that EPA did not evaluate oil and gas projects and, therefore, did not
determine if the proposed regulation is economically achievable for this industry. EPA's Final Action will
not affect oil and gas projects.
1.6 REPORT ORGANIZATION
This EA report is organized as follows:
Chapter Two contains the Industry Profile, which provides background information on
the establishments and industry sectors potentially affected by the proposed rule.
Chapter Three summarizes and discusses the options EPA considered in this
decisionmaking process.
Chapter Four, Economic Impact Analysis Methodology, explores the data,
methodology, and analyses used in the determination of project, firm, and market-level
impacts due to incremental stormwater control costs incurred under each of the options
considered.
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Chapter Five presents the impacts of the options considered on the project level, firm
level, and national and regional levels. This chapter also includes a discussion of other
potential impacts of the options considered according to Executive Order 12866,
including regional and social impacts.
Chapter Six contains information for use in the Final Regulatory Flexibility Analysis
(FRFA) and the small business analysis under the Regulatory Flexibility Act (RFA) as
amended by the Small Business Regulatory Enforcement Fairness Act (SBREFA).
Chapter Seven summarizes the methodology and results of EPA's benefits analysis,
which is presented in the Technical Development Document.
Chapter Eight looks at the costs and benefits of the options considered for the Final
Action using the benefits assessment described in Chapter Seven. Here, EPA presents an
assessment of the nationwide costs and benefits of the options considered pursuant to
Executive Order 12866 and the Unfunded Mandates Reform Act (UMRA).
Chapter Nine presents a discussion of the results of analyses pertaining to additional
UMRA requirements.
1.7 REFERENCES
U.S. EPA, 2004a. Development Document for the Effluent Guidelines for the Construction and
Development Point Source Category. Washington, DC: U.S. Environmental Protection Agency,
EPA-821 -B-04-001.
U.S. EPA, 2004b. Summary of Public Comments with Responses Based on the Proposed Effluent
Limitations Guidelines for Construction and Development. Washington, DC: U.S.
Environmental Protection Agency.
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CHAPTER TWO
PROFILE OF THE CONSTRUCTION & DEVELOPMENT INDUSTRY
2.1 INTRODUCTION
The C&D industry plays an integral role in the nation's economy, contributing approximately
five percent of the Gross Domestic Product (GDP). Establishments in this industry are involved in a wide
variety of activities, including land development and subdivision, homebuilding, construction of
nonresidential buildings and other structures, heavy construction work (including roadways and bridges).
Establishments are also involved in a myriad of special trades, such as plumbing, roofing, electrical,
excavation, and demolition work. Some of these activities result in land disturbances that can cause
erosion and the transport of soil and sediment in stormwater runoff (U.S. EPA, 2001). EPA's Options 1,
2, and 4 for the C&D industry seek to reduce the environmental and economic effects of stormwater
runoff from construction sites (Option 3 is the no-action alternative). See Chapter Three for more
information on the options EPA considered. EPA's decision for the Final Action is discussed in the
Preamble to that action.
Several characteristics of the C&D industry affect the structure of this economic analysis:
Individuals (e.g., homebuyers) are often the direct customers of the C&D industry. With
individuals as the direct consumer, it is helpful to address issues such as cost passthrough
and the impacts of regulations on housing affordability.
There are complex and varying relationships between developers and builders, resulting
in a variety of different business models. Developers may undertake all site
improvements and sell completed lots directly to builders, act as builders themselves and
remain onsite to build out the development, or some combination of the two.
The C&D industry is dominated by small businesses. EPA has, therefore, carefully
considered the impacts on small businesses in accordance with SBREFA.
C&D activities are highly localized. This suggests that a regional approach to analysis is
helpful in order to account for varying market conditions.
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According to standard definitions, the industry includes a large number of establishments
primarily engaged in remodeling activities and special trades (e.g., plumbing, electrical).
These establishments are less likely to be involved in land disturbing activities.
The C&D industry, as defined for this rule, is comprised of four main industry groups.
Land development and subdivision
Residential construction (including single-family and multifamily construction)
Nonresidential construction (including commercial and industrial construction)
Heavy construction
These four industry groups encompass those parts of the industry most likely to engage in land
disturbing activities and further affect the structure of this analysis. EPA is concerned with stormwater
runoff from construction sites, which carries increased sediment loads (and potentially increased loads of
metals and nutrients) into receiving waters, impairing the functioning of those waters (U.S. EPA, 2001).
2.1.1 Recent Trends in the C&D Industry
Table 2-1 presents the number of C&D establishments in 1992, 1997, and 2000. Data for the
years 1992 and 1997 are from the Economic Census, whereas 2000 data are from the U.S. Census
Bureau's County Business Patterns. The 2002 Economic Census data were not available when this report
was published. Between 1992 and 1997, the number of C&D industry establishments with payroll
increased 11.0 percent, from 235,789 to 261,617. Between 1997 and 2000, the number of establishments
with payroll increased another 8.8 percent to 284,627 (see Table 2-1). This modest increase masks some
significant offsetting changes in establishment counts among groups within the industry as defined by the
North American Industry Classification System1 (NAICS):2
1 This profile refers to the 1997 NAICS classification. Construction-related NAICS codes were revised in
2002. As our primary data source, the 1997 Census of Construction, has not been restated in the new classification,
so we continue to use the 1997 NAICS system. Appendix 2-A at the end of Chapter Two provides a cross-walk to
the 2002 NAICS classification.
2 The Census Bureau classifies industries according to the NAICS. Under the NAICS, economic activity is
first divided into twenty broad two-digit industry codes. One of these is Construction (NAICS 23). Each two-digit
industry is further subdivided into threee-, four-, and five-digit level industries.
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The number of establishments in the land development industry group (NAICS 2331)
decreased by 46.6 percent between 1992 and 1997 and increased by 60.2 percent
between 1997 and 2000.
• Between 1992 and 1997, there was a 13.5 percent increase in the number of
establishments in residential and nonresidential construction (NAICS 233, except 2331).
The number of establishments increased by another 6.4 percent between 1997 and 2000.
• While the number of establishments in heavy construction increased by 14.5 percent
between 1992 and 1997, the number decreased by 7.1 percent from 1997 to 2000.
There was a 33.0 percent increase in the number of special trades contractor
establishments (NAICS 235) between 1992 and 1997, including a 31.2 percent increase
among excavation contractors and a 59.6 percent increase among demolition contractors.
Between 1997 and 2000, the number of establishments engaged in special trades
contracting increased by another 45.5 percent. During this time period, establishments
specializing in excavation contracting increased by 48.1 percent while those in
demolition contracting increased by 13.7 percent.
Table 2-1. Number of Establishments in the C&D Industry, 1992 and 1997 Economic
Census Data and 2000 County Business Patterns Data
NAICS
Description
1992
1997
2000
Percent
Change
1992-1997
Percent
Change
1997-2000
233,
except
233 la
Building, developing, and general
contracting, except land development
and subdevelopment
168,407
191,101
203,243
13.5%
6.4%
2331
Land development and subdevelopment
15,338
8,185
13,111
-46.6%
60.2%
234
Heavy construction
37,180
42,557
39,516
14.5%
-7.1%
235b
Special trade contracting
14,864
19,771
28,757
33.0%
45.5%
TOTAL
235,789
261,617
284,627
11.0%
8.8%
" Includes both residential and nonresidential construction.
b Includes NAICS 23593 (Excavation contractors) and 23594 (Wrecking and demolition contractors) only.
Figures do not necessarily add to totals due to rounding.
Source: U.S. Census Bureau (2000), U.S. Census Bureau (2003a).
2.1.2 Data Sources Used
Several data sources are used in this profile chapter to characterize the C&D industry. The
primary data source is the 1997 Census of Construction (herein referred to as the census), conducted
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every five years by the U.S. Census Bureau3. A second data source comes from the U.S. Small Business
Administration (SBA). The SBA data is used because it provides firm-level data that is useful for
economic modeling purposes and for the small entity analysis (the census data is reported at the level of
the construction establishment, not the firm). Table 2-2 compares the census data with that from SBA in
order to further clarify the differences and identify how each are used in this EA. The majority of this
chapter uses data from the 1997 Census to profile the C&D industry, since that source provides a greater
level of detail on industry characteristics.
Table 2-2. Comparison of Major Data Sources
Characteristic
Data Source
Census of Construction
SBA
Level of Detail
Establishment3
Firmb (company) and establishment
Source of Data
Survey (sent to approximately 130,000
establishments from a universe of
650,000)
County Business Patterns SUSB
report, which ultimately relies on
administrative records data
How the Data are Applied
in this Analysis
Industry-level analysis to determine the
number of potentially affected
establishments
Firm-level analysis, for purposes of
determining the number of
potentially affected firms
considered "small" by SBA size
standards
a The Census Bureau defines an establishment as "a relatively permanent office or other place of business where
the usual business activities related to construction are conducted" (U.S. Census Bureau, 2000).
b A firm is considered to be an aggregation of the establishments owned by a single company; therefore, one firm
could comprise several establishments.
The 2002 Census of Construction was fielded in December 2002. Completed questionnaires were
due in February 2003. Many respondents requested and received extensions of the filing deadline. With
data entry, follow-up, consistency checks, and summarization, results are not expected to be released until
2004 and 2005. The new census will provide improved data for analyses such as this one. It will be
based on the 2002 NAICS classification, which distinguishes builders of new construction from
remodelers and offers more detailed classification of building trades. A special section was added to the
census to explore joint venture relationships, which commenters on the proposed rule have cited as a
3 The 2002 Census is not available.
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significant form of business organization. The 2002 Census data, unfortunately, are not available for this
analysis.
2.1.3 Organization of this Chapter
The purpose of this profile is to provide an overview of the C&D industry, describe its key
characteristics and structure, and analyze current and historical trends. Section 2.2 describes the process
that EPA used to identify and define the industry for the purposes of the proposed rule and Final Action.
Section 2.3 presents characteristics of the C&D industry, including both industry and firm-level data.
Section 2.4 covers industry growth and trends, and Section 2.5 briefly examines international competition
in the C&D industry. Detailed discussions on market supply and demand factors in the C&D industry,
economic and financial characteristics of the industry, and key business indicators and ratios can be found
in the Economic Analysis of the proposed rule (U.S. EPA, 2002).
2.2 INDUSTRY DEFINITION
2.2.1 Basis for Regulation
The Final Action will potentially affect establishments within the construction sector (NAICS 23)
that disturb the land at construction sites of 1 acre or more or 5 acres or more, depending on the option
selected for the Final Action. These land-disturbing activities can include site preparation and site
clearing tasks, such as tree removal, excavation, blasting, scraping, and grading, and are generally
accomplished with the aid of heavy equipment, such as skidders, bulldozers, backhoes, excavators, and
graders. These activities can destabilize soils and create conditions that allow stormwater to accumulate
and flow across the site. This increase in stormwater flow can cause erosion and lead to the transport of
soil particles and attached pollutants, which eventually can be conveyed offsite and discharged into
receiving waters. Both the increased flow and associated pollutant and sediment loads that result from
land-disturbing activities can negatively impact the biological, physical, and chemical characteristics of
the receiving waters.
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Options 1, 2, and 4 build on the Phase I and Phase II stormwater regulations promulgated under
the National Pollutant Discharge Elimination System (NPDES), as well as on EPA's stormwater
construction general permit (CGP). The CGP is the vehicle through which Phase I and Phase II
regulations are being implemented. Where EPA is the permitting authority. See Chapter One for more
details on the CGP. As with the proposed rule, Options 1, 2 and 4 also build on current state and local
stormwater control requirements by adding increased specificity and consistency to them. See Chapter
Three for more information on the options EPA considered. The methodology chapter (Chapter Four)
provides further detail on how the options are designed to be implemented.
2.2.2 Industry Definition
For the purposes of this economic analysis, the "C&D industry" is assumed to include those
establishments within the construction sector (NAICS 23) that could be involved in activities that disturb
the ground at construction sites. This includes site clearing or site preparation activities, such as tree
removal, excavation, blasting, scraping, grading, etc. EPA believes that many establishments in NAICS
233 (building, developing, and general contracting) and NAICS 234 (heavy construction) are likely to
engage in such activities on a regular basis. Establishments within selected five-digit industries that are
part of NAICS 235 (special trade contractors) could also engage in land-disturbing activities. The latter
could include NAICS 23593 (excavation contractors) and 23594 (wrecking and demolition contractors).
The remainder of the special trades industry is considered unlikely to engage in such activities.
Table 2-3 identifies the industry groups that could be covered by the Final Action.
As seen in Table 2-3, each NAICS industry is comprised of one or more industry groups defined
under the former Standard Industrial Classification (SIC) system. With the 1997 Census, the Census
Bureau switched from reporting data on a SIC basis to a NAICS basis, thereby making it difficult to
compare data from 1997 with that from the 1992 and earlier census reporting periods. Within this
economic profile, the objective is to provide data at the most detailed level as possible, while still
maintaining the ability to provide meaningful comparisons between 1997 and earlier census periods.
With this goal in mind, EPA made further adjustments to the groups of affected industry groups later in
this chapter and in Chapter Four to correspond to assessments of the likelihood that the industry groups
will disturb land or that they will disturb only small sites and, thus, meet the site size exclusions reflected
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Table 2-3. Industry Definitions for C&D Industry Profile
1997
NAICS Code
Description
Relevant SIC Codesa
233
Building, develoninn, and general contracting
2331
Land subdivision and development
23311
Land subdivision and development
6552 Land subdividers and developers, except cemeteries
2332
Residential building construction
23321
Single-family housing construction
1521 General contractors-single-family houses
1531 Operative builders (partial)
8741 Management services (partial)
23322
Multifamilv housing construction
1522 General contractors-residential buildings other than
single-family (partial)
1531 Operative builders (partial)
8741 Management services (partial)
2333
Nonresidential building construction
23331
Manufacturing and industrial building
construction
1531 Operative builders (partial)
1541 General contractors-industrial buildings and
warehouses (partial)
8741 Management services (partial)
23332
Commercial and institutional building
construction
1522 General contractors-residential buildings, other than
single-family (partial)
1531 Operative builders (partial)
1541 General contractors-industrial buildings and
warehouses (partial)
1542 General contractors-nonresidential buildings except
industrial buildings and warehouses
8741 Management services (partial)
234
Heavy Construction
2341
Highway, street, bridge, and tunnel
construction
23411
Highway and street construction
1611 Highway and street construction contractors, except
elevated highways
8741 Management services (partial)
23412
Bridge and tunnel construction
1622 Bridge, tunnel, and elevated highway construction
2349
Other heavy construction
23491
Water, sewer, and pipeline construction
1623 Water, sewer, pipeline, and communications and power
line construction (partial)
8741 Management services (partial)
23492
Power and communication transmission
line construction
1623 Water, sewer, pipeline, and communications and power
line construction (partial)
8741 Management services (partial)
23493
Industrial nonbuilding structure
construction
1629 Heavy construction, n.e.c. (partial)
8741 Management services (partial)
23499
All other heavy construction
1629 Heavy construction, n.e.c. (partial)
7353 Heavy construction equipment rental and leasing
(partial)
8741 Management services (partial)
235
SDecial trade contractors
23593
Excavation contractors
1794 Excavation work special trade contractors
23594
Wrecking and demolition contractors
1795 Wrecking and demolition work special trade
contractors
a NAICS replaced the SIC (Standard Industrial Classification) System.
Source: U.S. Census Bureau (2000).
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in the regulatory options. The statistical tables contained in this profile reflect these adjustments.4 Certain
categories are also excluded later in this EA based on qualitative assessments that they are unlikely to
bear the ultimate impact of the regulatory options.
The NAICS covered in this EA include:
NAICS 233, except 2331—Building, developing, and general contracting, except land
subdivision and land development
NAICS 2331—Land subdivision and land development
NAICS 234—Heavy construction (when possible, covered industries are only to include
NAICS 23593 [excavation contractors] and NAICS 23594 [wrecking and demolition
contractors].)
NAICS 235—Special trades contractors
2.3 INDUSTRY CHARACTERISTICS
As in the proposed rule, several steps are used to define the number of C&D establishments that
could be affected by the options EPA considered. First, EPA identifies all C&D establishments, as
defined above, using data from the 1997 Census of Construction (see Table 2-1). Second, EPA estimates
the number of establishments classified as C&D establishments that are primarily engaged in remodeling
work, using data from the National Association of Home Builders (NAHB) and the Joint Center for
Housing Studies at Harvard University (Joint Center). Third, EPA estimates the number of
establishments classified as C&D establishments that are engaged in C&D activities, but unlikely to
disturb 1 or more acres of land or 5 or more acres of land, using data from the Census Bureau and various
secondary sources. Section 2.3.1 examines the industrywide characteristics, including the number and
size of establishments, employment, and geographic distribution of establishments. Section 2.3.2
4 Some detailed breakdowns are available only at the three-digit NAICS level. Separate data for NAICS
2331 cannot be provided and will be included with data for all of NAICS 233. NAICS 233, except 2331, includes
data for both residential and nonresidential construction activities. Where more detailed data are available, they are
included in this profile. In some cases, data at a more detailed NAICS level are available (e.g., five-digit NAICS)
but are too detailed to present in the body of this profile. The availability of such data is noted throughout the
profile, and reference is made to Appendix 2A in the Economic Analysis of the proposed rule, where tables present
this data (U.S. EPA, 2002).
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describes firm-level data for the C&D industry. Section 2.3.3 presents the number of small entities, and
Section 2.3.4 examines the number of entities that disturb less than 1 acre during the normal course of
business. The estimated number of in scope and potentially affected establishments is presented in
Section 2.3.5.
2.3.1 Establishment-Level Data
This section presents data for all establishments within the C&D industry as defined in Section
2.2, based primarily on 1997 Census of Construction sources. It includes information on the number and
size, geographic distribution, employment, payroll and benefits, and level of specialization of
establishments.
2.3.1.1 Number and Size of Establishments
Data from the Census of Construction indicate that there were a total of 261,617 establishments
with payrolls in the C&D industry in 1997 (i.e., NAICS 233, 234, 23593, and 23594; see Tables 2-1 and
2-4). Of these establishments, the largest number are in NAICS 233 (building, developing, and general
contracting). This subsector includes 199,289 establishments, representing 76.2 percent of all C&D
establishments. Within NAICS 233, single-family home construction (NAICS 23321) accounted for the
majority of establishments (138,849 out of 199,289 or 69.7 percent).
Land development and subdevelopment (NAICS 2331) accounted for 8,185 establishments or 3.1
percent of all establishments in the C&D industry. NAICS 234 (heavy construction) includes 42,557
establishments or 16.3 percent of the total. Of these establishments, 27 percent are primarily highway and
street construction contractors, while 27 percent are contractors that work on water, sewer, pipeline,
communications, and power line projects and 43 percent are engaged in other types of heavy construction
(all other heavy construction). Within the special trades contractors subsector (NAICS 235), NAICS
23593 (excavation contractors) and 23594 (wrecking and demolition contractors) account for 19,771
establishments, or 7.6 percent of the C&D industry total. Excavation contractors account for more than
90 percent of these establishments.
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Table 2-4. Number of Establishments in the C&D Industry, Based on the 1997 Census of
Construction
NAICS
Description
Establishments With Payrolls
Number
Percent of Total
233
Building, developing, and general contracting
199,289
76.2%
2331
Land development and subdivision
8,185
3.1%
23321
Single-family residential building construction
138,849
53.1%
23322
Multi-family residential building construction
7,543
2.9%
2333
Nonresidential construction
44,710
17.1%
234
Heavy construction
42,557
16.3%
235a
Special trade contracting
19,771
7.6%
SUBTOTAL
261,617
100.0%
" Covered industry groups include NAICS 23593 (excavation contractors) and NAICS 23594 (wrecking and
demolition contractors) only.
Across the board, C&D industry groups are dominated by small establishments.5 As shown in
Table 2-5, the Census Bureau reports that 60.6 percent of establishments with payrolls have fewer than 5
employees, 77.8 percent have fewer than 10 employees, and 87.1 percent have fewer than 20 employees.6
Overall, only 1.1 percent of C&D establishments with payrolls have 100 or more employees. On average,
establishments in NAICS 234 (heavy construction) are somewhat larger than those in the other NAICS
industry groups, with a lower percentage of establishments appearing in each of the smaller establishment
size classes.
5 The SBA uses size standards based on either the number of employees or annual revenue (13 CFR 121) to
classify establishments as "small". Qualifying revenue levels differ among NAICS industry groups, and, within the
C&D industries, there is a range of qualifying revenue levels, from $5.0 million for NAICS 23311 (land subdivision
and development) to $27.5 million for the majority of industry groups within NAICS 233 and 234. Under the new
2002 NAICS structure, size standards for construction firms have been updated to $6.0 million for NAICS 23311
(land subdivision and development) and $28.5 million for the majority of industry groups within NAICS 233 and
234 (U.S. SBA, 2002). A more detailed review of industry size distribution based on the SBA definitions will be
presented as part of the Small Entity Impact Analysis.
6 As noted above, 450,338 establishments in the C&D industry have no employees.
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The preponderance of small establishments is equally apparent when analyzed on the basis of
revenue size class. In 1997, 37.1 percent of establishments with payrolls had annual revenues below
$250,000, 54.7 percent had annual revenues below $500,000, and 69.6 percent had annual revenues
below $1.0 million. These data are shown in Table 2-6. Only 9,118 establishments, representing 3.5
percent of the total, had annual revenues in excess of $10.0 million. The small business analysis is
presented in Chapter 6 of this EA.
In addition to the small establishments with payrolls, a large number of establishments— 450,338
in 19977—operate with no paid employees and are not included in the totals in Tables 2-4 through 2-6.
Available data suggest these establishments are very small relative to establishments with payrolls. While
employer establishments in NAICS 233 and 234 had $517.7 billion in receipts for 1997, nonemployer
establishments had only $36.5 billion in receipts, which represents only 7 percent of the receipts of
employer establishments.
Table 2-5. Number of Small Establishments with Payrolls in the C&D Industry, Based on
Employment
NAICS
Description
Total
Establishments
with less than
5 employees
Establishments
with less than
10 employees
Establishments
with less than
20 employees
No.
Percent
of Total
No.
Percent
of Total
No.
Percent
of Total
233a
Building, developing, and
general contracting
199,289
138,926
69.7%
172,079
86.3%
187,672
94.2%
234
Heavy construction
42,557
18,956
44.5%
26,802
63.0%
33,337
78.3%
235b
Special trade contractors
19,771
700c
3.5%
4,690
23.7%
6,833
34.6%
TOTAL
261,617
158,582
60.6%
203,571
77.8%
227,842
87.1%
a Data below the three-digit NAICS (i.e., for NAICS 2331 Land development and subdevelopment) are not publishable.
b Only covers establishments in NAICS 23593 (excavation contractors) and 23594 (wrecking and demolition contractors).
c Data for NAICS 23593 (excavation contractors) are not included in this calculation because data did not meet publication
standards.
Figures do not necessarily add to totals due to rounding.
Source: U.S. Census Bureau (2000).
7 This figure only includes establishments in NAICS 233 and 234. Data on nonemployer establishments
were not available at the five-digit NAICS level for NAICS 235. Thus information for NAICS 23593 and 23594
could not be separated from the rest of NAICS 2359 (other special trade contractors). Including all nonemployer
establishments in NAICS 2359 (339,521), the total number of such establishments in the C&D industry is 789,859
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Table 2-6. Number of Small Establishments in the C&D Industry, Based on Value of
Business Done
NAICS
Description
Total
Establishments with
less than $250,000
in business
Establishments with
less than $500,000 in
business
Establishments with
less than $1 million
in business
No.
Percent
of Total
No.
Percent
of Total
No.
Percent
of Total
233a
Building, developing,
and general contracting
199,289
83,536
41.9%
118,493
59.5%
147,917
74.2%
234
Heavy construction
42,557
13,364
31.4%
20,238
47.6%
26,726
62.8%
235"-'
Special trade
contractors
19,771
269
1.4%
4,344
22.0%
7,385
37.4%
TOTAL
261,617
97,169
37.1%
143,075
54.7%
182,028
69.6%
a Data below the three-digit NAICS (i.e., for NAICS 2331 Land development and subdevelopment) are not publishable.
b Only covers establishments in NAICS 23593 (excavation contractors) and 23594 (wrecking and demolition contractors).
'Figures could be low due to lack of sufficient data for NAICS 23593 (excavation contractors) and 23594 (wrecking and
demolition contractors) for values under $250,000.
Figures do not necessarily add to totals due to rounding.
Source: U.S. Census Bureau (2000).
The average level of receipts among nonemployer establishments is $81,000 versus $1.98 million
for establishments with payrolls. A recent study by the Joint Center indicates that a substantial number of
the nonemployer establishments—at least 141,000 of those classified as general building contractors
(NAICS 233)—are actually remodelers (Joint Center, 2001).8 The Joint Center estimates do not account
for nonemployer establishments outside NAICS 233 (i.e., NAICS 234 [heavy construction] or 235
[special trades]).
2.3.1.2 Legal Form of Organization
The Census Bureau defines construction establishments according to how they are organized
legally, using the following classification scheme: (a) corporations, (b) proprietorships, (c) partnerships,
and (d) other. In 1997, a total of 173,602 C&D establishments with payrolls (66.4 percent of the total)
were organized as corporations (see Table 2-7). A further 64,733 (24.7 percent) were organized as
8 The estimate of 141,000 establishments may be an underestimate. The Joint Center applied the percentage
of establishments with payrolls known to be remodelers to the nonemployer establishments. In practice, remodelers
probably account for a larger percentage of nonemployer establishments than employer establishments. As the
report states, "our procedures thus generate a conservative estimate of the number of businesses concentrating their
activities in residential remodeling" (Joint Center, 2001, p. 35).
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Table 2-7. Number of Establishments in the C&D Industry with Payrolls, by Legal Form of Organization
NAICS
Description
Corporations
Proprietorships
Partnerships
Other
Total
Number
Percent
of Total
Number
Percent
of Total
Number
Percent
of Total
Number
Percent
of Total
Number
Percent
of Total
233
Building, developing,
and general
contracting, except
land subdivision and
development (2331)
124,475
65.1%
50,235
26.3%
9,827
5.1%
6,567
3.4%
191,104
100.0%
2331
Land subdivision and
development
6,268
76.6%
327
4.0%
1,323
16.2%
267
3.3%
8,185
100.0%
234
Heavy construction
30,682
72.1%
8,401
19.7%
2,115
5.0%
1,359
3.2%
42,557
100.0%
235a
Special trade
contractors
12,177
61.6%
5,770
29.2%
1,048
5.3%
776
3.9%
19,771
100.0%
TOTAL
173,602
66.4%
64,733
24.7%
14,313
5.5%
8,969
3.5%
261,617
100.0%
a Only covers establishments in NAICS 23593 (excavation contractors) and 23594 (wrecking and demolition contractors).
Source: U.S. Census Bureau (2000).
2-13
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proprietorships, while 14,313 (5.5 percent) operated as partnerships and 8,969 (3.5 percent) operated
under some other legal form of organization. Organization as a corporation is most prevalent in NAICS
2331 (land subdivision and development), at 76.6 percent, and least prevalent in NAICS 235 (special
trade contractors), at 61.6 percent. See Appendix 2A in the Economic Analysis of the proposed rule for
more detailed industry-level data (U.S. EPA, 2002).
2.3.1.3 Geographic Distribution
Figure 2-1 shows a geographic distribution of establishments by state. The largest concentrations
of establishments are in California, New York, Texas, Florida, and Pennsylvania. Combined, these states
account for approximately 25 percent of C&D establishments in the United States.
Total Number of C&D Establishments
.V
I J 0-2,499 I \ - •: f 5,000-9,9999 20,000-25,000
2,500-4,999 I ! 10,000-19,999
Number of Establishments
Source; Bureau of the Census, 1997 Census of Construction,
Figure 2-1. Number of Establishments in the C&D Industry, by State, in 1997.
2-14
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Some commenters said that it was possible that EPA underestimated the number of
establishments affected by the options and, therefore, understated costs of the options. EPA believes the
estimates are reasonable; the estimates do not affect national costs, which are calculated using the total
number of disturbed acres (see Chapter Four).
2.3.1.4 Employment
In 1997, establishments with payrolls in the C&D industry employed a total of nearly 2.4 million
people. Table 2-8 shows a distribution of employment by NAICS industry group. NAICS 2331 (land
subdivision and land development) accounts for 41,827 employees (1.8 percent of the total), while the
rest of NAICS 233 (building, developing, and general contracting) accounts for 1.3 million employees, or
55.2 percent of the total. NAICS 234 (heavy construction), employs 880,400 people (37.3 percent of the
total), and NAICS 23593 and 23594 (excavation contractors and wrecking/demolition contractors)
employ 135,057 people (5.7 percent of the total).
Table 2-8. Number of Employees in the C&D Industry, Establishments With Payrolls, in
1997
NAICS
Description
Number of
Employees
Percent
of Total
233, except
2331
Building, developing, and general contracting, except land
subdivision and land development
1,301,126
55.2%
2331
Land subdivision and land development
41,827
1.8%
234
Heavy construction
880,400
37.3%
235a
Special trade contractors
135,057
5.7%
TOTAL
2,358,410
100.0%
a Only includes NAICS 23593 (excavation contractors) and 23594 (wrecking and demolition contractors).
Source: U.S. Census Bureau (2000).
Construction is a seasonal activity in many parts of the country, and employment data from the
industry reflect this fact. Figure 2-2 shows quarterly employment data for all NAICS groups in the C&D
industry. It also displays the annual average. Employment of construction workers was lowest in March,
at 1.59 million, and highest in August at 1.83 million.
2-15
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233 Building construction excluding
land development
1,000
900
800
700
600
500
400
300
200
100
0
March
August November
234 Heavy construction
500
0
1 400
o
| 300
HI
March
May
August November
140
120
o
100
o
o
80
0)
b
fin
o
o
b
HI
40
20
0
2331 Land development
March
August November
235 Special trades
March
May
August November
Source: U.S. Census Bureau (2000)
Figure 2-2. Seasonal Trends in Employment in the C&D Industry, 1997.
2.3.1.5 Payrolls an d Ben efits
In 1997, the payrolls of all C&D industry groups totaled $76.8 billion (see Table 2-9). Of this
number, $48.3 billion (62.9 percent) went to construction workers and $28.5 billion (37.1 percent) went
2-16
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to other employees.9 In addition, the C&D industry incurred $11.2 billion in legally required fringe
benefit expenditures and $6.5 billion in voluntary fringe benefits expenditures, for a total of $17.6 billion
in fringe benefits.10 Table 2-9 shows detailed data on payrolls and benefits for each of the C&D industry
groups.
2.3.1.6 Specialization
Specialization in the C&D industry refers to the percentage of establishment revenues earned
from different types of construction activity. Specialization data provide insight into the homogeneity of
businesses classified within the same NAICS industry group. Each establishment reports its degree of
specialization to the Census Bureau, based on the percentage of revenue earned from each type of
construction work. Some establishments in NAICS 23321, for example, are specialized, (i.e., earn 51
percent or more of revenues in either detached single-family housing construction or attached single-
family housing construction).11 Establishments that are 100 percent specialized in detached, single-family
housing construction performed construction work worth $90.4 billion, or 64.4 percent of all work done
by establishments with specialization in construction work. Similarly, 52.8 percent of the work ($6.6
billion) was done by establishments with complete specialization in attached single-family houses.
Further analysis of the specialization and value of construction work performed by the C&D industry
groups can be found in the Economic Assessment for the proposed rule (U.S. EPA, 2002).
9 Construction workers include all workers, through the working supervisor level, directly engaged in
construction operations, such as painters, carpenters, plumbers, and electricians. Included are journeymen,
mechanics, apprentices, laborers, truck drivers and helpers, equipment operators, and onsite recordkeepers and
security guards. Other employees include employees in executive, purchasing, accounting, personnel, professional,
technical and routine office functions.
10 Legally required contributions include Social Security contributions, unemployment compensation,
workman's compensation, and state temporary disability payments. Voluntary expenditures include life insurance
premiums, pension plans, insurance premiums on hospital and medical plans, welfare plans, and union negotiated
benefits.
11 Although some of them earn revenues from other types of construction (e.g., highway construction) they
are no longer be classified in NAICS 23321 if they earn 51 percent or more of their revenue from such sources.
2-17
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Table 2-9. Payrolls and Benefits for Emp
oyees in the C&D (Thousands of 1997 Dollars)
NAICS
Description
Payrolls3
Fringe Benefits (All Employees)
Construction
Worker b
Other Employees0
All
Employees'1
Legally Required
Expenditures6
Voluntary
Expenditures'
Total Fringe
Benefits®
233
Building, developing, and general
contracting
$23,135,832
$19,410,280
$42,546,112
$5,929,710
$3,011,115
$8,940,824
23311
Land subdivision and land development
$254,247
$1,255,526
$1,509,773
$164,669
$71,648
$236,317
23321
Single-family housing construction
$7,739,858
$7,224,726
$14,964,583
$2,000,118
$623,079
$2,623,197
23322
Multifamily housing construction
$1,022,265
$744,361
$1,766,627
$255,879
$76,644
$332,523
23331
Manufacturing and industrial building
construction
$3,322,347
$1,806,620
$5,128,967
$777,829
$446,522
$1,224,351
23332
Commercial and institutional building
construction
$10,797,116
$8,379,046
$19,176,160
$2,731,214
$1,793,222
$4,524,436
234
Heavy construction
$22,218,582
$8,073,267
$30,291,850
$4,665,757
$3,120,979
$7,786,736
23411
Highway and street construction
$7,095,139
$2,432,488
$9,527,626
$1,507,465
$1,109,177
$2,616,641
23412
Bridge and tunnel construction
$1,378,759
$468,401
$1,847,160
$344,821
$263,297
$608,117
23491
Water, sewer, and pipeline construction
$4,087,007
$1,435,273
$5,522,281
$844,394
$493,761
$1,338,155
23492
Power and communication transmission
line construction
$1,748,715
$638,717
$2,387,432
$374,145
$231,538
$605,683
23493
Industrial nonbuilding structure
construction
$2,734,020
$988,343
$3,722,363
$486,625
$302,813
$789,439
23499
All other heavy construction
$5,174,943
$2,110,046
$7,284,989
$1,108,307
$720,394
$1,828,701
235h
Special trade contractors
$2,940,440
$1,005,609
$3,946,050
$582,157
$329,925
$912,082
23593
Excavation contractors
$2,525,857
$828,017
$3,353,874
$483,764
$283,952
$767,716
23594
Wrecking and demolition contractors
$414,583
$177,592
$592,176
$98,393
$45,973
$144,366
TOTAL
$48,294,854
$28,489,156
$76,784,012
$11,177,624
$6,462,019
$17,639,642
a The payroll figures include the gross earnings paid in the calendar year 1997 to all employees on the payrolls of construction establishments. They include all forms of compensation, such as
salaries, wages, commissions, bonuses, vacation allowances, sick leave pay, prior to such deductions as employees' Social Security contribution, withholding taxes, group insurance, union dues,
and savings bonds.
b Construction workers include all workers, through the working supervisor level, directly engaged in construction operations, such as painters, carpenters, plumbers, and electricians. Included are
journeymen, mechanics, apprentices, laborers, truck drivers and helpers, equipment operators, and onsite recordkeepers and security guards.
c Other employees include employees in executive, purchasing, accounting, personnel, professional, technical and routine office functions.
d Sum of construction workers and other employees.
e Legally required contributions include Social Security contributions, unemployment compensation, workman's compensation, and state temporary disability payments.
f Voluntary expenditures include life insurance premiums, pension plans, insurance premiums on hospital and medical plans, welfare plans, and union negotiated benefits.
g Total fringe benefits represent the expenditures made by the employer during 1997 for both legally required and voluntary fringe benefit programs for employees.
h Only covers establishments in NAICS 23593 (excavation contractors) and 23594 (wrecking and demolition contractors).
Source: U.S. Census Bureau (2000).
2-18
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2.3.2 Firm-Level Data
The SBA Office of Advocacy contracts with the U.S. Census Bureau to produce firm-level data
for U.S. industries. Currently, distributions by employment size are available on a NAICS basis for 2000
and distributions by receipt size are available on a SIC basis for 1997.
The SBA data is based primarily on administrative records and is not generated in conjunction
with, or linked to, data collected through the Census of Construction. As a result, there could be minor
inconsistences between data reported by SBA and those reported by the Census of Construction.12 The
SBA/Census of Construction data, however, are the only firm-level data available for C&D industry
groups, so EPA is including than in this analysis. These data are valuable to the economic modeling and
the small entity analysis, which applies at the firm, not the establishment, level.13
2.3.2.1 Number and Size of Firms (SBA Data)
Table 2-10 presents the number of firms with payrolls (firms with paid employment) and the
number of establishments in the C&D industry in 2000, as reported by SBA.14 These data indicate that a
majority of firms operate a single establishment and have fewer than 20 employees. Of the 214,651 C&D
firms tallied by SBA for 2000, approximately 99 percent operate only one establishment, and 93 percent
have fewer than 20 employees; less than 1 percent of firms have more than 500 employees. In 2000,
there were 38,304 firms in heavy construction, which operated 39,516 establishments. Almost 97
12 The SBA data, for example, provide estimates of the number of establishments operated by C&D firms.
These establishment counts, however, do not match those reported in the Census of Construction. This
inconsistency is partially due to differences in coverage (the SBA data include administrative establishments while
the Census of Construction does not) as well as differences in data collection methods.
13 For clarification, an establishment is defined as "a relatively permanent office or other place of business
where the usual business activities related to construction are conducted" (U.S. Census Bureau, 2000). A firm
refers to the aggregation of all establishments owned by one company; one firm, therefore, could consist of several
establishments.
14 "The data excludes non-employer businesses, thus excluding many self-employed individuals
(employment is measured in March, so firms starting after March, firms closing before March, and seasonal firms
can have zero employment)." SBA Office of Advocacy Website, .
2-19
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percent of the heavy construction firms operate a single establishment, and approximately 78 percent of
these firms have fewer than 20 employees.
Table 2-10. Firms and Establishments by Employment Size and NAICS Codes, 2000-(SBA
Data)
Description
NAICS
Firms
Establishments
Total
0
<20
<500
500+
Total
0
<20
<500
500+
Building, developing, and
general contracting
233
214,651
33,472
200,611
214,250
401
216,354
33,474
200,662
214,785
1,569
Land subdivision and land
development
23310
12,902
2,982
12,127
12,811
91
13,111
2,984
12,141
12,884
227
Single-family housing
construction
23321
150,685
24,403
145,864
150,594
91
151,296
24,403
145,880
150,770
526
Multifamily housing
construction
23322
8,208
1,312
7,518
8,177
31
8,254
1,312
7,518
8,191
63
Manufacturing and industrial
building construction
23331
6,984
723
5,561
6,920
64
7,039
723
5,562
6,934
105
Commercial and institutional
building construction
23332
36,022
4,052
29,549
35,815
207
36,654
4,052
29,561
36,006
648
Heavy construction
234
38,304
4,243
29,702
38,008
296
39,516
4,246
29,724
38,320
1,196
Highway and street
construction
23411
10,434
1,267
7,631
10,339
95
10,889
1,267
7,637
10,440
449
Bridge and tunnel
construction
23412
872
58
480
846
26
906
58
481
861
45
Water, sewer, and pipeline
construction
23491
7,390
578
5,316
7,344
46
7,483
579
5,319
7,371
112
Power and communication
transmission line
construction
23492
3,411
469
2,630
3,364
47
3,644
470
2,632
3,389
255
Industrial nonbuilding
structure construction
23493
631
51
407
568
63
689
51
407
574
115
All other heavy construction
23499
15,702
1,820
13,239
15,594
108
15,905
1,821
13,248
15,685
220
Excavation contractors
23593
26,980
4,966
25,570
26,967
13
27,005
4,966
25,570
26,982
23
Wrecking and demolition
contractors
23594
1,733
375
1,447
1,727
6
1,752
375
1,447
1,733
19
Source: U.S. SBA (2000), based on data provided by the U.S. Census Bureau.
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2.3.2.2 Firm-Level Revenues (SBA Data)
Table 2-11 shows SBA's data on the number of employer firms and establishments, in 1997,
based on NAICS industry group and revenue size class. These data also show that most firms in the C&D
industry are small. Approximately three-quarters (75.2 percent) of the firms in the target industry sectors
reported under $1.0 million in revenues for 1997; nearly 94 percent of firms reported revenues lower than
$5.0 million.
2.3.3 Number of Small Entities
SBA uses size standards based on either number of employees or annual revenue to define small
entities (13 CFR 121). For all of the C&D industry groups, the size standards are based on annual
revenues. Table 2-12 presents the SBA revenue thresholds for the C&D industry, which range from $5.0
million for NAICS 23310 (land subdivision and land development) to $27.5 million for the majority of
NAICS 233 (building, developing, and general contracting) and NAICS 234 (heavy construction).15 An
estimated 189,805 C&D businesses, representing 99.5 percent of all businesses in the C&D industry, fall
below the SBA-defined revenue thresholds for this industry and, therefore, could qualify as small
businesses under SBA definitions. Table 2-12 shows the total estimated number of businesses and total
small businesses in the C&D industry; the number of potentially affected small businesses is developed in
Chapter Six.
2.3.4 Entities Not Covered by the Final Action
Not all establishments and firms that fall within the industry definitions outlined in the previous
sections will be affected by the Final Action. The Final Action will apply only to those establishments
engaged in activities that disturb land. EPA believes that some entities will be excluded from regulatory
coverage under Options 1, 2, and 4 because they are primarily engaged in remodeling activities that will
15 SBA has revised the small business size standards for some NAICS codes. The new size standards for
construction firms have been updated to $6.0 million for NAICS 23311 (land subdivision and development) and
$28.5 million for the majority of industries within NAICS 233 and 234 (U.S. SBA, 2002).
2-21
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Table 2-11. Firms and Establishments with Payrolls by Revenue Size Class, 1997a (SBA Data)
Description
Firms
Establishments'1
Total
Number of
Firms
<$1
Million
<$5
Million
<$7.5
Million
<$25
Million
< $100
Million
More than
$100
Million
Total
Establish-
ments
< $1
Million
<$5
Million
<$7.5
Million
<$25
Million
<$100
Million
More than
$100
Million
Land subdivision and
Development
11,036
7,744
10,207
10,501
10,851
10,948
88
11,205
7,746
10,218
10,514
10,896
11,018
186
Single-family housing
Construction
149,130
123,414
145,305
146,917
148,634
148,975
155
149,823
123,420
145,339
146,962
148,736
149,161
661
Multifamily housing
Construction
6,911
5,128
6,347
6,518
6,791
6,877
34
7,009
5,129
6,354
6,527
6,810
6,910
99
Manufacturing and industrial
building construction
7,950
4,674
6,841
7,156
7,692
7,879
71
8,075
4,675
6,847
7,166
7,713
7,914
160
Commercial and institutional
building construction
38,195
22,518
32,523
34,085
36,964
37,882
313
39,044
22,526
32,560
34,133
37,075
38,124
920
Highway and street
construction
10,778
5,683
8,681
9,291
10,320
10,679
99
11,117
5,683
8,689
9,302
10,349
10,758
359
Bridge and tunnel
construction
875
287
583
638
788
847
28
915
288
584
640
795
859
56
Water, sewer, and pipeline
construction
7,916
4,475
6,861
7,245
7,768
7,883
33
8,075
4,476
6,864
7,251
7,791
7,938
137
Power and communication
transmission line construction
2,781
1,572
2,411
2,546
2,729
2,770
11
2,837
1,572
2,412
2,548
2,738
2,789
48
Industrial nonbuilding
structure construction
3,941
2,786
3,612
3,713
3,860
3,909
32
4,023
2,787
3,617
3,720
3,874
3,936
86
All other heavy construction
12,973
9,110
11,873
12,213
12,697
12,863
111
13,594
9,118
11,920
12,279
12,814
13,087
507
Excavation contractors
22,046
19,093
21,659
21,820
22,002
22,038
8
22,072
19,093
21,661
21,823
22,005
22,055
17
Wrecking and demolition
contractors
1,270
840
1,165
1,204
1,249
1,261
9
1,285
840
1,166
1,205
1,252
1,271
14
TOTAL
275,802
207,324
258,068
263,847
272,345
274,811
992
279,074
207,353
258,231
264,070
272,848
275,820
3,250
" Data are for 1997. SBA does not report revenue size class data in NAICS format and will not do so until the 2002 Economic Census is published. These
figures were calculated using percentages provided in the Census Bureau's NAICS to SIC bridge, which is available at
b The number of establishments reported here could differ from the number reported in previous tables due to the different sources used (see Table 2-2 and
accompanying text for further discussion). Earlier tables are based on data from the 1997 Economic Census; Table 2-11 is based on 1997 data from
SB A/Census of Construction and was converted from SIC to NAICS for the purposes of this analysis.
Source: U.S. SBA (2000)
2-22
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Table 2-12. Number of Firms and Establishments Above and Below SBA Thresholds for
Small Business Definition: (SBA Data)
NAICS
SBA Revenue
Threshold
(million $)
Total Estimated
Number of
Businesses
Estimated
Number of
Small
Businesses
Small Businesses
as a Percent of
Total
23321: Single-family
housing construction
$27.5
138,732
138,583
99.9%
23322: Multifamily
housing construction
$27.5
7,534
7,491
99.4%
23331: Manufacturing
and industrial building
construction
$27.5
7,257
7,050
97.1%
23332: Commercial and
institutional building
construction
$27.5
37,220
36,681
98.6%
TOTAL
-
190,743
189,805
99.5%
Note: For those industry groups with a $27.5 million SBA cutoff, the table shows the number of firms and
establishments with revenues below $25.0 million (the next closest SBA data break point). For industry groups
with a $11.5 million SBA cutoff, figures shown are for firms and establishments with revenues below $7.5
million. SBA has adopted the 2002 NAICS classification and revised small business size standards. The new size
standards for construction firms have been updated to $6.0 million for NAICS 23311 (land subdivision and
development) and $28.5 million for the majority of industry groups within NAICS 233 and 234 (U.S. SBA,
2002). This change is not reflected in this study because since the SBA data break points remain unchanged.
Source: U.S. SBA (2000); also, see Chapter Six.
not result in land disturbance. Others will be excluded because they are, generally, not the primary
NPDES permit holder. As discussed in Section IV.A in the preamble of the proposed rule, special trade
contractors are typically not identified as NPDES permit holders and are therefore unlikely to be covered
by the Final Action. In this section, EPA provides estimates of the number of establishments that fall into
this category. The resulting estimates are brought together in Section 2.3.5 to derive final estimates of the
number of establishments covered by the Final Action.
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2.3.4.1 Establishments Engaged in Remodeling
Two sources provide information on the potential number of C&D establishments that are
actually remodelers. In an article published in Housing Economics, NAHB economists estimated that, in
1997, approximately 45,952 establishments in the residential building industry were involved in
remodeling activities only (Ahluwalia and Chapman, 2000). This count is based on analysis of census
microdata on establishments, receipts, and source of receipts. Establishments were classified as
remodelers in this study if they earned 100 percent of revenues from remodeling activities.
The Joint Center recently published a report on the remodeling industry (Joint Center, 2001).
This report classified establishments that derive at least half of their revenues from remodeling activities
as remodelers. When defined in this manner, the study found that 62,400 establishments classified as
general contractors/builders in 1997 were actually remodelers.
Both of these estimates pertain to establishments classified by the Census of Construction as
general contractors/builders. The Joint Center study goes further to identify establishments classified in
various special trades (e.g., carpentry and plumbing) that are primarily engaged in remodeling, but these
estimates do not include establishments that are considered part of the C&D industry (i.e., NAICS 23593,
excavation contractors, and 23594, wrecking and demolition contractors).16 NAHB does not address the
issue of special trades contractors in its report. Neither report addresses the number of establishments in
NAICS 234 (heavy construction) that could be engaged primarily in remodeling activities; EPA, however,
does not expect that establishments in the heavy construction sector would be engaged primarily in
remodeling activities.
After reviewing these studies, EPA concluded that the Joint Center's estimate of the number of
remodelers included in C&D industry statistics was the best. This study defines remodelers as
establishments that earn at least 50 percent of their revenues from remodeling (and thus earn less than 50
percent from building activity). EPA concludes that these establishments, when engaged in building
16 The Joint Center study does provide an estimate for the number of remodelers classified in
"miscellaneous special trades" (NAICS 2359), which includes NAICS 23593, NAICS 23594, and several other
industry groups. The number of remodelers classified primarily in NAICS 23593 and 23594, is not necessarily
large, however, as the total number in NAICS 2359 is only 6,600.
2-24
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activity, are unlikely to disturb more than 1 acre of land and would, therefore, not be covered by the Final
Action.
2.3.4.2 Establishments That Are Not NPDES Permittees
In the universe of potentially affected establishments, EPA has included all establishments in
NAICS 23593 (excavation contractors) and 23594 (wrecking and demolition contractors) because such
establishments engage in land disturbing activities. In reality, however, establishments in these industries
generally act as subcontractors on C&D projects and are hired by developers or general contractors to
perform specific tasks. EPA does not believe that such establishments generally appear as NPDES
permittees or copermittees. While these establishments are included among the universe of potentially
affected establishments (and appear in Table 2-13), EPA has not included them in the subsequent
economic analysis chapters (e.g., Chapters Four, Five, and Six).
2.3.5 Number of Potentially Affected Entities
EPA took several steps to adjust the number of affected entities to account for regulatory
coverage and data availability. Previous sections estimated that the total number of establishments in the
C&D industry is 261,617 (see Table 2-4). Subtracting the 62,400 remodeling establishments estimated in
Section 2.3.4.1 from this figure yields a potentially affected universe of 199,217 establishments. EPA
allocated the 62,400 residential remodeling establishments between the single-family and multifamily
building construction industry groups (NAICS 23321 and NAICS 23322), based on their respective share
of all residential building establishments.
In preparing its economic impact analysis, EPA concluded that data limitations on land
developers (NAICS 2331) would preclude retaining them as a separate industry group for purposes of
regulatory analysis.17 Rather than excluding establishments in this industry group (which would cause
EPA to potentially underestimate the number of affected entities and associated impacts), EPA distributed
17 Specifically, EPA could not obtain equivalent financial data with which to build financial models of the
land development industry.
2-25
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them among the four building construction industry groups (single-family, multifamily, commercial, and
industrial construction), based on each industry group's share of total establishments.18
Table 2-13 reflects this allocation, which was completed after removing establishments primarily
engaged in remodeling.
EPA has further adjusted the population of affected establishments to account for differences in
regulatory coverage. As described in Chapter Three, the Final Action considers three erosion and
sediment control (ESC) options. Option 1 applies to sites that disturb 1 acre or more of land, while
Options 2 and 4 apply to operations that disturb 5 acres or more of land at a site. Option 3 is the no-rule
option, meaning that no sites or establishments would be affected.
EPA used data from the Census Bureau and other sources to define an average housing density
for the nation as a whole (average number of housing units per acre), then used this figure to identify
classes of establishments that would be excluded based on their likelihood of disturbing less than 1 acre
(Option 1) or 5 acres (Options 2 and 4) on a project basis. EPA believes that these estimates (of
establishments unaffected by the Final Action) are conservative. First, while the regulatory threshold
applies to each site, EPA excluded establishments if the estimated number of acres disturbed in a year
was below the regulatory threshold. In addition, the analysis was not adjusted for the percentage of site
area normally left undisturbed.19
18 EPA provides further justification for and details about this step in Chapter Four.
19 An establishment that completes 15 houses per year, for example, is estimated to account for 5.6 acres of
converted land, based on the average housing density of 2.67 new single-family housing units per acre. EPA would
include this establishment among those covered under Option 2, although the actual area disturbed could be less
than 5 acres after factoring in open space, buffers, and other "undisturbed" areas. Furthermore, as noted, EPA
assumes that all of the housing units are covered by a single NPDES permit, while in reality the establishment could
operate on several sites, none of which exceeds the 5-acre threshold.
2-26
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Table 2-13. Number of Potentially Affected and In-scope Establishments in the C&D Industry
NAICS
Description
Total Number
of
Establishments
Total Number of
Establishments
with Removal of
62,400 Remodelers
Allocation of
NAICS 2331
to NAICS
233
Option 1
Options 2 and 4
<1 Acre
Exclusionb
Excluding
Special
Trades
<5 Acre
Exclusion0
Excluding
Special
Trades
233210
Single-family housing
construction
138,849
79,664
84,731
34,070
34,070
21,362
21,362
233220
Multifamily housing
construction
7,543
4,328
4,603
4,603
4,603
2,699
2,699
233320
Commercial and
institutional building
construction
37,430
37,430
39,810
39,810
39,810
39,810
39,810
233310
Manufacturing and
industrial building
construction
7,279
7,279
7,742
7,742
7,742
7,742
7,742
Total NAICS 233, except 2331
191,104
128,701
136,886
86,225
86,225
71,613
71,613
2331
Land subdivision and
development
8,185
8,185
234
Heavy construction
42,557
42,557
42,557
42,557
42,557
42,557
42,557
235a
Special trade
contractors
19,771
19,771
19,771
19,771
19,771
Total
261,617
199,217
199,217
148,553
128,782
133,941
114,170
" Only covers establishments in NAICS 23593 (excavation contractors) and 23594 (wrecking and demolition contractors).
b Excludes 50,661 firms constructing single-family homes.
c Excludes 12,708 firms constructing single-family homes and 1,904 firms constructing multifamily housing.
Note: Numbers do not necessarily add to totals due to rounding.
Source: U.S. Census Bureau (2000).
2-27
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Based on this analysis, EPA assumed that establishments in the single-family building
construction industry (NAICS 2331) that complete between one and four housing units each year are
excluded under Option 1. Under Option 2, EPA also assumed that establishments in the single-family
building construction industry (NAICS 2331) that complete between five and nine housing units and
establishments in the multifamily building construction industry (NAICS 2332) that complete between
two and nine housing units each year, are excluded. Although comments were received on this
assumption, EPA believes it is justified in making this adjustment (see Chapter One and the Response to
Comments Document [U.S. EPA 2004]). Chapter Four contains further detail on the data sources and
method used to make this adjustment.
Table 2-13 summarizes the steps followed to make the adjustment, from the 261,617
establishments reported in Table 2-4 to the distribution of establishments potentially affected under
Options 1, 2, and 4. It shows the removal of remodelers, the redistribution of land developers (NAICS
2331), and the removal of small builders considered exempt under the site size exclusions of each option.
It also shows the removal of the special trades industry groups under each option. As discussed in Section
XII of the Preamble of the proposed rule, special trade contractors are not included in Chapter Five
(Economic Impact Analysis Results) of this report. Special trade contractors are typically subcontractors
and generally are not NPDES permittees. These contractors, therefore, will not be directly affected by any
of the options considered, regardless of EPA's choice. Due to limited data, the number of establishments
in NAICS 234 (heavy construction) affected under each option could not be refined further, so no
adjustments were made to these establishment counts.
2.4 INDUSTRY DYNAMICS
For purposes of the economic analysis, EPA selected 1997 as the baseline year for constructing
financial models. In part this reflects the availability of data from the 1997 Census of Construction, but in
addition, EPA believes 1997 to be a reasonably representative year for the affected industry group. Costs,
however, reflect year 2000 dollars (see Chapter Four). Before reaching the conclusion to use 1997
financial data, EPA examined historical activity data for the construction industry, reviewed analyses
ofrecent trends, and looked at projections for the future. As a result of this review, EPA concluded the
following:
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Historically, construction activity has been highly cyclical. Data from 1959 through
2002 for new housing units authorized by building permit show an overall growth trend
that is punctuated by cyclical swings (see Figure 2-3). Highs were reached in 1972,
1978, and 1986 and lows were reached in 1974, 1982, and 1991.
Since 1991, the industry has been on a fairly continuous growth trend. Single-family
housing, for example, grew from an annual level of 0.7 million new units in 1991 to 1.3
million new units in 2002, which represents an average annual growth rate of 6.8 percent.
During this same period, real GDP grew by an average of 3.8 percent per year (BEA,
2003).
Structural changes in the market have made construction less cyclical than before. In a
recent analysis, the NAHB identified several factors that contributed to the reduction in
cyclicality of housing market activity. These factors include the easing of rules on credit
availability, the subsequent development of adjustable-rate mortgage instruments, and the
maturation of the secondary market for mortgage-backed securities (NAHB, no date).
The Next Decade for Housing, an NAHB report, predicts that between 2001 and 2010 the
nation will build an average of 1.82 million new homes per year, up from an average of
1.66 million per year between 1991 and 2000 (see Table 2-14).
A surprising feature of the most recent economic slowdown is that it has not significantly
affected construction activity, particularly, new home construction. As NAHB's chief
economist wrote in early 2002, "Believe it or not, 2001 turned out to be a record year for
sales of both new and existing homes, despite three quarters of economic recession and
the shock of the terrorist attacks" (Seiders, 2002).
Based on this review, EPA concluded that financial data from the year 1997 provide a reasonable
basis for characterizing the industry groups likely to be affected by the Final Action. In particular, EPA
concluded that there is nothing to suggest that 1997 represents a particularly robust year.
2.5 INTERNATIONAL COMPETITIVENESS
Construction activities are highly localized, with most activities being performed either in the
state of the establishment or in neighboring states. Some of the largest builders could perform work
nationwide. The Census of Construction includes only construction activities within the United States; it
does not mention construction work that U.S. establishments conducted outside the U.S. (U.S. Census
Bureau, 2000). EPA concludes that U.S. construction firms conduct a negligible amount of work outside
of the United States.
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1,500
/
Thousands of units
Ol O
o o
o o
k A A AT
1 unit
2-4 units
5 units or more
pJ\f\l „_
0
J v y—
. . ¦ *. . ~
1959 1964 1969 1974 1979 1984 1989 1994 1999
Year
Source: U.S. Census Bureau (2003c)
Figure 2-3. New Privately Owned Housing Units Authorized by Building Permits in
Permit-Issuing Places: Annual Data
Table 2-14. Housing Supply and Demand - Historical Data and Projections for 2001-2010
(average per year in thousands)
1971-1980
1981-1990
1991-2000
2001-2010
Projection
Change in households
1,578
1,281
1,137
1,255
Change in vacancies
151
219
184
223
Net removals
333
214
343
344
TOTAL DEMAND
2,062
1,714
1,664
1,822
New single-family
1,110
979
1,108
1,203
New multifamily
602
491
257
343
Mobile homes
349
244
298
276
TOTAL SUPPLY
2,062
1,714
1,664
1,822
Source: NAHB (no date); based on U.S. Census Bureau data and NAHB forecasts.
2-30
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2.6 REFERENCES
AhulwaliaG., J. Chapman. 2000. Structure of the Residential Construction Industry. Housing Economics.
National Association of Home Builders. 38(10):7-11.
BEA. 2003. Bureau of Economic Analysis. National Income and Product Accounts Tables. Available
online at http://www.bea.doc.gov/bea/dn/nipaweb/index.asp.
Joint Center. (Joint Center for Housing Studies of Harvard University). 2001. Remodeling Homes for
Changing Households.
NAHB (National Association of Home Builders). No Date. The Next Decade for Housing. National
Association of Home Builders. Available online at http: //www .nahb. com/facts
nextdecadeforecast.pdf.
Seiders, David. 2002. Housing and the Economy in the Aftermath of the September 11 Attacks on
America. National Association of Home Builders, January 3. Available online at
http: //www .nahb. com/news/Jan31 -02seiderscommentarv .htm.
U.S. Census Bureau. 2000. 1997 Economic Census: Construction, United States. Various Reports.
Available online at: http://www.census.gov/epcd/ec97/us/US000 23.HTM.
U.S. Census Bureau. 2003a. County Business Patterns, 2000. Available online at
http: //www .census. gov/epcd/cbp/vie w/cbpview .html.
U.S. Census Bureau. 2003b. 2002 NAICS-US Matched to 1997 NAICS-US. Available online at
http://www.census.gov/epcd/naics02/tl02to97.pdf.
U.S. Census Bureau. 2003c. New Privately Owned Housing Units Authorized by Building Permits in
Permit-Issuing Areas. Available online at http://www.ceneus.gov/pub/const/bpann.pdf.
U.S. EPA. 2001. Construction and Development Effluent Guidelines: Background. Washington, DC: U.S.
Environmental Protection Agency, Office of Water. Available online at:
http://www.epa.gov/ost/guide/construction/background.html.
U.S. EPA. 2002. Economic Analysis of Proposed Effluent Guidelines and Standards for the Construction
and Development Category. Washington, DC: U.S. Environmental Protection Agency. EPA 821-
R-02-008. May.
U.S. EPA. 2004. Summary of Public Comments with Responses Based on the Proposed Effluent
Limitations Guidelines for Construction and Development. Washington, DC: U.S.
Environmental Protection Agency.
U.S. SBA (Small Business Administration). 2000. Statistics of U.S. Businesses: Firm Size Data [HTML
Files]. Available online at: http://www.sba.gov/advo/stats/data.html. U.S. SBA (Small Business
Administration). 2002. Table of Small Business Size Standards Matched to the North American
Industry Classification System (NAICS 2002), Effective October 1, 2002. Available online at:
http://www.sba.gov/size/sizetable2002.pdf.
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Appendix 2a. Crosswalk between 1997 NAICS and 2002 NAICS structures
2002 NAICS Code
Description
Relevant 1997 NAICS codes
236
Construction of buildings
2361
Residential building construction
23611
Residential building construction
236115
New single-family housing
construction (except operative
builders)
233210 Single-family housing construction (except
operative builders and remodeling contractors)
236116
New multifamily housing
construction (except operative
builders)
233220 Multifamily housing construction (except barrack
and dormitory construction, operative builders, and
remodeling contractors)
236117
New housing operative builders
233210 Single-family housing construction (operative
builders)
233220 Multifamily housing construction (operative
builders)
236118
Residential remodelers
233210 Single-family housing construction (remodeling
contractors)
233220 Multifamily housing construction (remodeling
contractors)
2362
Nonresidential building
construction
236210
Industrial building construction
233310 Manufacturing and industrial building construction
(except grain elevators, dry cleaning plants, and
manufacturing and industrial warehouses)
234930 Industrial nonbuilding structure construction
(process batch plants, incinerators, industrial furnaces and
kilns, mining appurtenance, and construction management of
these projects)
234990 All other heavy construction (waste disposal plant
construction)
236220
Commercial and institutional
building construction
233220 Multifamily housing construction (barrack and
dormitory construction)
233310 Manufacturing and industrial building construction
(grain elevators, dry cleaning plants, and manufacturing and
industrial warehouses)
233320 Commercial and institutional building construction
235990 All other special trade contractors (indoor
swimming pools)
237
Heavy and civil engineering construction
2371
Utility system construction
237110
Water and sewer line and related
structures construction
234910 Water, sewer, and pipeline construction
(water/sewer pumping stations, sewage collection and
disposal lines, storm sewers, sewer/water mains and lines,
water storage tanks and towers, and construction
management of these projects)
234990 All other heavy construction (irrigation systems,
sewage treatment and water treatment plants, construction
management of these projects)
235810 Water well drilling contractors
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Appendix 2a. Crosswalk between 1997 NAICS and 2002 NAICS structures
2002 NAICS Code
Description
Relevant 1997 NAICS codes
237120
Oil and gas pipeline and related
structures construction
213112 Support activities for oil and gas operations
(construction of field gathering lines on a contract basis)
234910 Water, sewer, and pipeline construction (gas and
oil pumping stations, gas and oil pipeline construction, gas
mains, gas and oil storage tank construction, and
construction management of these projects)
234930 Industrial nonbuilding structure construction
(petrochemical plants, refineries, and construction
management of these projects)
237130
Power and communication line and
related structures construction
234920 Power and communication transmission line
construction
234930 Industrial nonbuilding structure construction
(power generation plants (excluding hydroelectric dams),
transmission and distribution transformer stations, and
construction management of these projects)
2372
Land subdivision
237210
Land subdivision
233110 Land subdivision and land development
2373
Highway, street, and bridge
construction
237310
Highway, street, and bridge
construction
234110 Highway and street construction
234120 Bridge and tunnel construction (bridge
construction)
235210 Painting and wall covering contractors (highway
and traffic line painting)
2379
Other heavy and civil engineering
construction
237990
Other heavy and civil engineering
construction
234120 Bridge and tunnel construction (tunnel
construction)
234990 All other heavy construction (except waste disposal
plant construction, irrigation systems, sewage treatment and
water treatment plants, right-of-way cleaning and line
slashing, blasting, trenching, and equipment rental with
operator)
235990 All other special trade contractors (anchored earth
retention contractors)
238
Special trade contractors
2389
Other specialty trade contractors
238910
Site preparation contractors
213112 Support activities for oil and gas operations
213113 Support activities for coal mining
213114 Support activities for metal mining
213115 Support activities for nonmetallic minerals (except
fuels)
234990 All other heavy construction (right-of-way cleaning
and line slashing, blasting, trenching, and equipment rental
(except cranes) with operator)
235110 Plumbing, heating, and air-conditioning contractors
(septic tank, cesspool, and dry well construction contractors)
235930 Excavation contractors
235940 Wrecking and demolition contractors
235990 All other special trade contractors (dewatering
contractors, core drilling for construction, and test drilling
for construction)
Source: U.S. Census Bureau (2003b).
2-A2
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CHAPTER THREE
DESCRIPTION OF THE REGULATORY OPTIONS
Chapter One provided a summary of the Phase I and Phase II National Pollutant Discharge
Elimination System (NPDES) Stormwater Regulations and the Construction General Permit (CGP) for
the construction industry. This chapter describes the effluent limitation guidelines and standards (ELGS)
program (Section 3.1), recaps the existing requirements under the CGP (Section 3.2), and presents EPA's
options that are considered for the Final Action (Section 3.3).
3.1 EFFLUENT LIMITATION GUIDELINES AND STANDARDS
The Federal Water Pollution Control Act, passed in 1972 (CWA, 33 U.S.C. § 1251 et sea.),
established a comprehensive program to "restore and maintain the chemical, physical, and biological
integrity of the Nation's waters" (§101(a)), often referred to as "fishable, swimmable" status. The statute
was amended in 1987 to provide for a program to address stormwater discharges. In addition, under
sections 301, 304, 306, and 307 of the Clean Water Act (CWA), EPA is authorized to establish ELGs and
pretreatment standards for industrial dischargers. EPA is authorized to publish the following standards:
• Best Practicable Control Technology Currently Available (BPT). These rules apply to
direct dischargers. Generally, BPT limitations are based on the average of the best
existing performances by plants of various sizes, ages, and unit processes within a point
source category or subcategory.
• Best Available Technology Economically Achievable (BAT). These rules apply to direct
discharges of toxic and nonconventional1 pollutants.
1 Toxic pollutants are listed in Table 1 of U.S.C 1317 section 307(a)(1) and currently include 64 pollutants
and their organic and inorganic compounds. This list includes arsenic, DDT, lead, and mercury. Nonconventional
pollutants are any pollutants that are not statutorily listed (not covered by the list of toxic or conventional pollutants)
or which are poorly understood by the scientific community.
3-1
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• Best Conventional Pollutant Control Technology (BCT). These rules apply to direct
discharges of conventional pollutants.2 BCT limitations are generally established using a
two-part cost-reasonableness test. BCT replaces BAT for control of conventional
pollutants.
• Pretreatment Standards for Existing Sources (PSES). PSES are analogous to BAT
controls. These rules apply to existing indirect dischargers (i.e., dischargers to publicly
owned treatment works (POTWs).
• New Source Performance Standards (NSPS). These rules apply to discharges of all
pollutants from new sources.
• Pretreatment Standards for New Sources (PSNS). PSNS are analogous to NSPS
controls. These rules apply to new indirect dischargers (i.e., dischargers to POTWs).
Under the ELGs analyzed in this EA, EPA considered BAT, BPT, BCT, and NSPS guidelines
and standards for erosion and sediment control (ESC) during the active construction phase.
3.2 REQUIREMENTS UNDER THE EXISTING CONSTRUCTION GENERAL PERMIT
EPA's CGP, published in 1992, replaced in 1998, and replaced again in July 2003, directs
NPDES permittees to prepare a stormwater pollution prevention plan (SWPPP) for certain construction
activities. The CGP also calls for installation of temporary sediment basins for construction sites with
disturbed area of 10 acres or more. For projects disturbing less land, no specific ESCs are required. A
description of ESCs is to be contained in the SWPPP. The CGP requires the SWPPP to contain a
description of all post-construction stormwater management measures that will be installed during the
construction process to control pollutants in stormwater discharges after construction operations have
been completed, but no specific measures are required. As with ESCs, selected best management
practices (BMPs) are to be described in the SWPPP. The latest revision of the CGP expands the scope of
the permit to cover sites of 1 acre or more (the Phase II sites). See Chapter One for more information on
the recently revised CGP.
2 Conventional pollutants include biochemical oxygen demand (BOD), total suspended solids (TSS), fecal
coliform, pH, and oil and grease.
3-2
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3.3
SUMMARY OF REGULATORY OPTIONS/TECHNOLOGY ALTERNATIVES
EPA presents the analyses of four regulatory options in this EA:
Option 1, which requires enhanced inspection and BMP certification for all construction
sites where 1 acre of land or more is disturbed;
Option 2, which provides for codification of the CGP with enhanced inspection and BMP
certification for all construction sites where 5 acres of land or more are disturbed;
Option 3, which is a no-rule option; and
Option 4, a modified Option 2, which provides for codification of the CGP and applies to
all sites where 5 acres of land or more are disturbed, but does not require enhanced
inspection and BMP certification.
EPA has defined the baseline for the Final Action as full compliance with the current Phase I and
Phase IINPDES stormwater regulations (see Chapter One). EPA also assumes full compliance with
applicable state regulations (See Chapter Four, Section 4.1.2 for a discussion of EPA's state regulation
equivalency analysis). Table 3-1 summarizes the regulatory options under this baseline. Throughout the
analysis presented in this report, EPA treats the baseline as "Option 3." This table also provides a
crosswalk between current options, proposed options, and the options as they are labeled in certain final
ELG option selection materials that are found in the Rulemaking Record.
EPA's choice of option for the Final Action is discussed in the Preamble to the Final Action. All
four options (Options 1, 2, 3, and 4) are discussed in this report as equally possible choices for EPA's
Final Action.
3.3.1 Option 1
Option 1 is designed to amend the section of the Code of Federal Regulations (CFR) covering
NPDES permitting, 40 CFR Part 122, adding a new paragraph (t) entitled Inspection and Certification for
Construction Site Stormwater Discharges to § 122.44. These provisions are unchanged from proposal and
are designed to include:
3-3
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Table 3-1. Summary of Regulatory Options Considered for the Final Action
Option
Description
Regulatory
Mechanism
Applic-
ability
Option at
Proposal
Option Label
in EPA
Briefing
Materials
Option 1
Enhanced
inspection and BMP
certification
Amendment to
NPDES
stormwater
permitting
regulations
Sites of 1
acre or
more
Option 1
(unchanged)
NA
Option 2
Provisions to codify
the CGP with
enhanced inspection
and BMP
certification
requirements
ELGs
Sites of 5
acres or
more
Option 2
(unchanged)
Option B
Option 3
No regulation
(baseline)
N/A
All sites
Option 3
(unchanged)
Option C
Option 4
Provisions to codify
the CGP
ELGs
Sites of 5
acres or
more
NA
Option A
(a) Site log book. The permittee for a point source discharge under § 122.26(b)(14)(x) or
§ 122.26(b)(15) shall maintain a record of site activities in a site log book. The site log
book shall be maintained as follows:
(i) A copy of the site log book shall be maintained on site and be made available to
the permitting authority upon request;
(ii) In the site log book, the permittee shall certify, prior to the commencement of
construction activities, that any plans required by the permit meet all Federal,
State, Tribal and local erosion and sediment control requirements and are
available to the permitting authority;
(iii) The permittee shall have a qualified professional (knowledgeable in the
principles and practices of erosion and sediment controls, such as a licensed
professional engineer, or other knowledgeable person) conduct an assessment of
the site prior to groundbreaking and certify in the log book that the appropriate
best management practices (BMPs) described in plans required by the permit
have been adequately designed, sized and installed to ensure overall preparedness
of the site for initiation of groundbreaking activities. The permittee shall record
the date of initial groundbreaking in the site log book. The permittee shall also
certify that any inspection, stabilization and BMP maintenance requirements of
the permit have been satisfied within 48 hours of actually meeting such
requirements; and
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(iv) The permittee shall post at the site, in a publicly-accessible location, a summary
of the site inspection activities on a monthly basis;
(b) Site Inspections. The permittee or designated agent of the permittee (such as a consultant,
subcontractor, or third-party inspection firm) shall conduct regular inspections of the site
and record the results of such inspection in the site log book in accordance with
paragraph (t)(l) of this section.
(i) After initial groundbreaking, permittees shall conduct site inspections at least
every 14 calendar days and within 24 hours of the end of a storm event of 0.5
inches or greater. These inspections shall be conducted by a qualified
professional. During each inspection, the permittee or designated agent shall
record the following information:
(A) Indicate on a site map the extent of all disturbed site areas and drainage
pathways. Indicate site areas that are expected to undergo initial
disturbance or significant site work within the next 14 days;
(B) Indicate on a site map all areas of the site that have undergone temporary
or permanent stabilization;
(C) Indicate all disturbed site areas that have not undergone active site work
during the previous 14 days;
(D) Inspect all sediment control practices and note the approximate degree of
sediment accumulation as a percentage of the sediment storage volume
(for example 10 percent, 20 percent, 50 percent, etc.). Note all sediment
control practices in the site log book that have sediment accumulation of
50 percent or more; and
(E) Inspect all erosion and sediment control BMPs and note compliance with
any maintenance requirements such as verifying the integrity of barrier
or diversion systems (e.g., earthen berms or silt fencing) and containment
systems (e.g., sediment basins and sediment traps). Identify any evidence
of rill or gully erosion occurring on slopes and any loss of stabilizing
vegetation or seeding/mulching. Document in the site log book any
excessive deposition of sediment or ponding water along barrier or
diversion systems. Note the depth of sediment within containment
structures, any erosion near outlet and overflow structures, and verify the
ability of rock filters around perforated riser pipes to pass water.
(ii) Prior to filing of the Notice of Termination or the end of permit term, a final site
erosion and sediment control inspection shall be conducted by the permittee or
designated agent. The inspector shall certify that the site has undergone final
stabilization as required by the permit and that all temporary erosion and
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sediment controls (such as silt fencing) not needed for long-term erosion control
have been removed.
Option 1 is also designed to amend §122.44(i)(4) to exclude construction activities from
requirements for monitoring of stormwater discharges.
Option 1 is designed to apply to sites where 1 acre of land or more is disturbed.
3.3.2 Option 2
Option 2 is designed to add a new section to the ELGs section of the CFR (i.e., Part
450—Construction and Development Point Source Category). Option 2 remains unchanged from
proposal. This section is intended to essentially codify in the CFR the provisions of the CGP (see Section
3.2) and, in addition, is intended to add the provisions for inspection and certification introduced under
Option 1 (Section 3.3.1). Option 2 is designed to amend 40 CFR 122(i)(3) to specify that discharges from
construction activity are instead governed by Part 450.
40 CFR Part 450, Subpart A describes applicability and provides definitions. Subpart B is
intended to establish the ESC requirements based on application of BPT, BAT, BCT, and NSPS.
Under Option 2, Part 450 is intended to apply to C&D activities subject to an NPDES permit
under the definition of "construction activity" at 40 CFR 122.26(b)(14)(x). Section 450.11 establishes
some general definitions for the following terms: BMPs, commencement of construction, final
stabilization, groundbreaking, new source, operator, perimeter controls, qualified professional, runoff
coefficient, and stabilization.
Section 450.21 is designed to establish effluent limitations reflecting BPT, as follows:3
3 Parts 450.22, 450.23, and 450.24 would establish identical requirements for BAT, BCT, and NSPS,
respectively.
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Except as provided in 40 CFR 125.30 through 125.32, any existing point source subject to this
subpart must achieve the following effluent limitations representing the application of BPT. Permittees
with operational control of construction plans and specification, including the ability to make
modifications to those plans and specifications (e.g., developer or owner), must ensure the project
specifications that they develop meet the minimum requirements of a SWPPP, which are listed in §
450.21(d):
(a) General Erosion and Sediment Controls. Each SWPPP shall include a description of
appropriate controls designed to retain sediment on site to the extent practicable. These
general erosion and sediment controls shall be included in the SWPPP developed
pursuant to paragraph (d) of this section. The SWPPP must include a description of
interim and permanent stabilization practices for the site, including a schedule of when
the practices will be implemented. Stabilization practices may include:
(1) Establishment of temporary or permanent vegetation;
(2) Mulching, geotextiles, or sod stabilization;
(3) Vegetative buffer strips;
(4) Protection of trees and preservation of mature vegetation.
(b) Sediment Controls. The SWPPP must include a description of structural practices to
divert flows from exposed soils, store flows, or otherwise limit runoff and the discharge
of pollutants from exposed areas of the site to the degree attainable.
(1) For common drainage locations that serve an area with 10 or more acres
disturbed at one time, a temporary (or permanent) sediment basin that provides
storage for a calculated volume of runoff from a 2 year, 24-hour storm from each
disturbed acre drained, or equivalent control measures, shall be provided where
attainable until final stabilization of the site. Where no such calculation has been
performed, a temporary (or permanent) sediment basin providing 3,600 cubic feet
of storage per acre drained, or equivalent control measures, shall be provided
where attainable until final stabilization of the site. When computing the number
of acres draining into a common location it is not necessary to include flows from
off-site areas and flows from on-site areas that are either undisturbed or have
undergone final stabilization where such flows are diverted around both the
disturbed area and the sediment basin.
(2) In determining whether a sediment basin is attainable, the operator may consider
factors such as site soils, slope, available area on site, etc. In any event, the
operator must consider public safety, especially as it relates to children, as a
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design factor for the sediment basin, and alternative sediment controls shall be
used where site limitations would preclude a safe basin design.
(3) For portions of the site that drain to a common location and have a total
contributing drainage area of less than 10 disturbed acres, the operator should use
smaller sediment basins and/or sediment traps.
(4) Where neither a sediment basin nor equivalent controls are attainable due to site
limitations, silt fences, vegetative buffer strips or equivalent sediment controls
are required for all down slope boundaries of the construction area and for those
side slope boundaries deemed appropriate as dictated by individual site
conditions.
(c) Pollution Prevention Measures. The SWPPP shall include the following pollution
prevention measures:
(1) Litter, construction chemicals, and construction debris exposed to stormwater
shall be prevented from becoming a pollutant source in stormwater discharges
(e.g., screening outfalls, picked up daily); and
(2) A description of construction and waste materials expected to be stored on-site
with updates as appropriate, and a description of controls to reduce pollutants
from these materials including storage practices to minimize exposure of the
materials to stormwater, and spill prevention and response.
(d) Stormwater Pollution Prevention Plan. Operators subject to this Part shall compile
Stormwater Pollution Prevention Plans (SWPPPs) prior to groundbreaking at any
construction site. In areas where EPA is not the permit authority, operators may be
required to prepare documents that may serve as the functional equivalent of a SWPPP.
Such alternate documents will satisfy the requirements for a SWPPP so long as they
contain the necessary elements of a SWPPP. A SWPPP shall incorporate the following
information:
(1) A narrative description of the construction activity, including a description of the
intended sequence of major activities that disturb soils on the site (major
activities include grubbing, excavating, grading, and utilities and infrastructure
installation, or any other activity that disturbs soils for major portions of the site);
(2) A general location map (e.g., portion of a city or county map) and a site map. The
site map shall include descriptions of the following:
(i) Drainage patterns and approximate slopes anticipated after major grading
activities;
(ii) The total area of the site and areas of disturbance;
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(iii) Areas that will not be disturbed;
(iv) Locations of major structural and nonstructural controls identified in the
SWPPP;
(v) Locations where stabilization practices are expected to occur;
(vi) Locations of off-site material, waste, borrow or equipment storage areas;
(vii) Surface waters (including wetlands); and
(viii) Locations where stormwater discharges to a surface water;
(3) A description of available data on soils present at the site
(4) A description of BMPs to be used to control pollutants in stormwater discharges
during construction as described elsewhere in this section
(5) A description of the general timing (or sequence) in relation to the construction
schedule when each BMP is to be implemented;
(6) An estimate of the pre-development and post-construction runoff coefficients of
the site;
(7) The name(s) of the receiving water(s);
(8) Delineation of SWPPP implementation responsibilities for each site owner or
operator;
(9) Any existing data that describe the stormwater runoff characteristics at the site.
(e) Updating the SWPPP. The operator shall amend the SWPPP and corresponding erosion
and sediment control BMPs whenever:
(1) There is a change in design, construction, or maintenance that has a significant
effect on the discharge of pollutants to waters of the United States which has not
been addressed in the SWPPP; or
(2) Inspections or investigations by site operators, local, State, Tribal or Federal
officials indicate that the SWPPP is proving ineffective in eliminating or
significantly minimizing pollutant discharges.
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Site Log Book/Certification. The operator shall maintain a record of site activities in a
site log book, as part of the SWPPP. The site log book shall be maintained as follows:
(1) A copy of the site log book shall be maintained on site and be made available to
the permitting authority upon request;
(2) In the site log book, the operator shall certify, prior to the commencement of
construction activities, that the SWPPP prepared in accordance with paragraph
(d) of this section meets all Federal, State and local erosion and sediment control
requirements and is available to the permitting authority;
(3) The operator shall have a qualified professional conduct an assessment of the site
prior to groundbreaking and certify in the log book that the appropriate BMPs
and erosion and sediment controls described in the SWPPP and required by
paragraphs (a), (b), (c) and (d) of this section have been adequately designed,
sized and installed to ensure overall preparedness of the site for initiation of
groundbreaking activities. The operator shall record the date of initial
groundbreaking in the site log book. The operator shall also certify that the
requirements of paragraphs (g), (h) and (i) of this section have been satisfied
within 48 hours of actually meeting such requirements;
(4) The operator shall post at the site, in a publicly-accessible location, a summary of
the site inspection activities on a monthly basis.
Site Inspections. The operator or designated agent of the operator (such as a consultant,
subcontractor, or third-party inspection firm) shall conduct regular inspections of the site
and record the results of such inspection in the site log book in accordance with
paragraph (f) of this section.
(1) After initial groundbreaking, operators shall conduct site inspections at least
every 14 calendar days and within 24 hours of the end of a storm event of 0.5
inches or greater. These inspections shall be conducted by a qualified
professional. During each inspection, the operator or designated agent shall
record the following information:
(i) On a site map, indicate the extent of all disturbed site areas and drainage
pathways. Indicate site areas that are expected to undergo initial
disturbance or significant site work within the next 14-day period;
(ii) Indicate on a site map all areas of the site that have undergone temporary
or permanent stabilization;
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(iii) Indicate all disturbed site areas that have not undergone active site work
during the previous 14-day period;
(iv) Inspect all sediment control practices and note the approximate degree of
sediment accumulation as a percentage of the sediment storage volume
(for example 10 percent, 20 percent, 50 percent, etc.). Record all
sediment control practices in the site log book that have sediment
accumulation of 50 percent or more; and
(v) Inspect all erosion and sediment control BMPs and record all
maintenance requirements such as verifying the integrity of barrier or
diversion systems (earthen berms or silt fencing) and containment
systems (sediment basins and sediment traps). Identify any evidence of
rill or gully erosion occurring on slopes and any loss of stabilizing
vegetation or seeding/mulching. Document in the site log book any
excessive deposition of sediment or ponding water along barrier or
diversion systems. Record the depth of sediment within containment
structures, any erosion near outlet and overflow structures, and verify the
ability of rock filters around perforated riser pipes to pass water.
(2) Prior to filing of the Notice of Termination or the end of permit term, a final site
erosion and sediment control inspection shall be conducted by the operator or
designated agent. The inspector shall certify that the site has undergone final
stabilization using either vegetative or structural stabilization methods and that
all temporary erosion and sediment controls (such as silt fencing) not needed for
long-term erosion control have been removed.
Stabilization. The operator shall initiate stabilization measures as soon as practicable in
portions of the site where construction activities have temporarily or permanently ceased,
but in no case more than 14 days after the construction activity in that portion of the site
has temporarily or permanently ceased. This requirement does not apply in the following
instances:
(1) Where the initiation of stabilization measures by the 14th day after construction
activity temporarily or permanently ceased is precluded by snow cover or frozen
ground conditions, stabilization measures shall be initiated as soon as practicable;
(2) Where construction activity on a portion of the site is temporarily ceased, and
earth-disturbing activities will be resumed within 21 days, temporary
stabilization measures need not be initiated on that portion of the site.
(3) In arid areas (areas with an average annual rainfall of 0 to 10 inches), semi-arid
areas (areas with an average annual rainfall of 10 to 20 inches), and areas
experiencing droughts where the initiation of stabilization measures by the 14th
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day after construction activity has temporarily or permanently ceased is
precluded by seasonably arid conditions, the operator shall initiate stabilization
measures as soon as practicable.
(i) Maintenance. Sediment shall be removed from sediment traps or sediment ponds when
design capacity has been reduced by 50 percent.
Option 2 is designed to apply to construction sites where 5 acres of land or more are disturbed.
3.3.3 Option 3
Option 3 is the "no regulation" option. Under this option, stormwater runoff from C&D activities
continues to be managed in accordance with existing requirements. Where EPA is the permitting
authority, this generally means that discharges associated with the construction projects disturbing at least
1 acre will be controlled in accordance with the CGP (or an individual EPA-issued permit, as
appropriate). In states that are authorized to conduct their own NPDES programs, the state requirements
will continue to apply. Under this option, there are no incremental compliance requirements and,
similarly, no incremental compliance costs or benefits.
3.3.4 Option 4
Option 4 is a modification of Option 2 and also applies to sites where 5 acres of land or more are
disturbed. As such, it is identical to Option 2 in all particulars, with the exception of the exclusion of the
I&S requirements. It modifies the same section of the CFR, with the same intent to codify the provisions
of the CGP. The following lists the requirements that apply under Option 4:
Codify provisions of the EPA CGP
Prepare a SWPPP prior to groundbreaking
— Description and schedule of construction activity
— Site map indicating drainage patterns, area, locations of controls, surface waters,
discharge points, BMP descriptions, etc.
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Install sediment basins or equivalent controls for common drainage locations of 10 or
more acres, where attainable, designed to store runoff from the 2-year, 24-hour storm or
3,600 ft3/acre
Install smaller sediment basins and/or sediment traps for common drainage areas of
between 5 and 10 acres
Where neither sediment basins nor equivalent controls are attainable, install other
controls such as silt fences or vegetated buffer strips
Stabilize exposed soil areas within 14 days after construction activity has temporarily or
permanently ceased except:
— Arid and semi-arid areas
— During droughts or seasonally arid conditions
— Where precluded by snow and frozen ground
— Where construction activity will resume within 14 days
Conduct inspections at least every 7 calendar days OR every 14 days and following 0.5"
or greater rainfall except:
— Once a month if site is temporarily stabilized, during winter, during seasonal arid
periods
— Waiver available until one month before thawing conditions expected if project is
located in area with extended frozen conditions and land disturbance has been
suspended
Implement pollution prevention measures to prevent contamination of stormwater with
litter, construction chemicals, construction materials and construction debris and waste
materials
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CHAPTER FOUR
ECONOMIC IMPACT ANALYSIS METHODOLOGY
4.1 OVERVIEW OF ECONOMIC IMPACT ANALYSIS METHODOLOGY
This chapter presents EPA's methodology for analyzing the economic impacts of the Final Action
covering the C&D industry. EPA has employed a number of different methods for assessing the
economic impacts of the Final Action. EPA's approaches include modeling systems that analyze impacts
at the industry level and national level. The industry-level analyses model the construction project and
individual firm, and the national level analyses model national construction markets and the national
economy as a whole.
As discussed in detail in Chapter Three, EPA's analyses focus on the impacts of three options:
Option 1, Option 2, and Option 4. Option 1 requires enhanced inspection and BMP certification for all
sites 1 acre or greater, but does not involve codifying provisions of the EPA CGP. Option 2 involves
codifying provisions of the EPA CGP (the CGP component) with enhanced inspection and BMP
certification provisions (the inspection and certification component) for sites with 5 or more acres of
disturbed land. Option 4 also involves codifying provisions of the EPA CGP for sites with 5 or more
acres of disturbed land, but does not include the enhanced inspection and BMP certification provisions.
Option 2 is the same as Option 2 at proposal, while Option 4 is developed as a modified Option 2 (See
Chapter Three, Table 3-1). Option 3 would not establish new regulations, but would instead continue to
rely on the existing NPDES stormwater regulations (EPA's no-action alternative). EPA's analysis of
Option 3 is, therefore, equivalent to a regulatory baseline analysis.
This introduction presents the assumptions EPA uses to develop a regulatory baseline in Section
4.1.1. Section 4.1.2 describes the incremental compliance costs that are presented in EPA's Technical
Development Document (U.S. EPA, 2004) and summarizes how they were estimated. Section 4.1.3
provides an overview of the analyses in this EA report and discusses how EPA uses the incremental
compliance costs in each of the analyses. The section also provides a "road map," listing the location of
detailed discussions of the methodologies for each analysis.
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4.1.1 The Regulatory Baseline
To measure impacts of any regulatory action, EPA first generally establishes a baseline against
which to measure the incremental effects of a regulation. EPA's standard practice in developing
regulatory baselines is to assume full compliance with all existing state and federal regulations that affect
the entities in the analysis (see, for example, the EA for the industrial laundries subcategory [EPA,
2000]). For the C&D industry, EPA assumes that Options 2 and 4 affect markets that have fully
implemented the existing Phase I and II stormwater regulations and any state-level requirements that are
considered equivalent to the options under consideration (Section 4.1.2 provides a detailed discussion of
state equivalencies). EPA also assumes that industry will be in 100 percent compliance following
promulgation of the Final Action, which is a standard assumption in most EAs for ELGs. These baseline
assumptions are unchanged from proposal, although EPA has done additional work since proposal to
identify state-level equivalency to option requirements.
4.1.2 Engineering Costs
4.1.2.1 Description of the Engineering Cost Categories
All of the analyses in this EA are based on engineering cost estimates as presented in the
Technical Development Document (U.S. EPA, 2004). EPA develops incremental pollution control cost
estimates for three cost categories: ESC installation costs, design costs, and operating and maintenance
(O&M) costs.
Installation costs comprise the costs associated with purchasing the physical components or
materials required to build or install ESCs and the labor costs associated with installing those components
or materials. They are initially estimated on the basis of a unit cost (e.g., per mile of silt fencing). They
are converted to a per-site basis using assumptions about the number of units or fraction of units that are
required for an ESC at a site in a particular state, of a specific size, type, and environmental setting (see
Section 4.1.2.2). The installation costs also include costs associated with inspection and certification (if
any) and permitting.
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Design costs are associated with designing where and how the ESCs should be installed, and
O&M costs are the continuing costs of maintaining the ESCs. EPA generally estimates these latter two
cost categories based on percentages of installation costs. EPA estimates the cost of designing a silt fence
installation, for example, to be 16 percent of the cost of installing the silt fence and estimates the O&M
cost of maintaining the silt fence to be 100 percent of the cost of installing the silt fence. This is a
standard engineering cost estimation approach based on typical costs incurred by the industry (see the
Technical Development Document for more information).
4.1.2.2 Assumptions Used in Estimating Engineering Costs
To estimate the engineering costs, EPA assumes all costs are incurred in one year, so no
discounting for time is introduced. This approach is different from that used in most other ELG
development efforts. In the C&D industry, O&M costs are associated with the maintenance of ESCs
during the construction process. Thus, O&M costs are incurred in the same year as the installation rather
than being spread out over a long operating period, which is how O&M costs are typically incurred in
other industries.
EPA does not include any profit, overhead, opportunity cost of capital, or interest in the
engineering cost estimates derived as presented in the Technical Development Document. Where
relevant to a specific analysis, EPA adds these costs into that analysis. Opportunity and interest costs, for
example, are added to the national-level costs of compliance, but profit and overhead are not.1
'Overhead costs and profit are both estimated as a fixed percentage of total costs in the baseline and post-
compliance scenarios. Profit assumptions do not affect industry costs. Overhead costs, although accounted for in
certain analyses, are not used to calculate industry compliance costs. To be conservative in determining potential
impacts on consumers, impacts on final asking price are calculated assuming that compliance costs increase
overhead by a fixed percentage (10 percent). In reality, however, the very small cost increases due to the options
are unlikely to have any measurable effects on overhead, because most overhead costs are fixed costs that would not
change with minor cost increases. An increase of a few labor hours to install and maintain ESCs, for example, will
not have an effect on typical overhead costs, such as liability insurance costs, accounting fees, or office rental costs.
Adding overhead costs at the fixed percentage of 10 percent would vastly overstate total costs to industry.
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4.1.2.3 Land Use and Size Breakouts
EPA develops installation, design, and O&M cost estimates for four types of land use: single-
family, multifamily, commercial, and industrial. EPA also designates a number of site sizes for each land
use category: 0.5 acre, 3 acre, 7.5 acre, 25 acre, 70 acre, and 200 acre. EPA develops the costs for each of
these land use categories by size on a state-by-state basis. This level of cost analysis allows EPA to
determine the effect of state regulations considered equivalent to the various C&D options on the costs of
compliance in each state.
4.1.2.4 State Equivalency Analysis
To determine the equivalency of state requirements, EPA carefully reviewed the state
requirements related to construction permitting in all 50 states. EPA then compiled an assessment, on a
requirement-by-requirement basis, that indicated whether a state had a requirement on its books
considered equivalent to an Option 1, 2, or 4 requirement. If a state had a requirement to install runoff
diversion, for example, and this requirement was deemed equivalent to an Option 2 or 4 requirement, then
the cost to install runoff diversion would be eliminated for all sites in that state when EPA developed
costs for Option 2 or 4. Alternatively, if the state did not have such a requirement and was not identified
as a low rainfall state, EPA assumed the cost of runoff diversion, consistent with Options 2 or 4, would be
incurred at sites in that state when calculating the costs of those options.
4.1.2.5 Accounting for Region-Specific Cost Factors
EPA makes one final adjustment to site costs, using cost factors from R.S. Means (2000) to
account for the fact that costs in states vary from the national average. R.S. Means data, for example,
indicate that costs of construction are 80 percent of the national average in Alabama, but 113 percent of
the national average in California. For each state, all site costs are adjusted by that state's cost factor.
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4.1.2.6 Adapting Engineering Costs For Use in the Economic Models
In summary, EPA calculates the costs of installing an ESC at a site that is characterized by state,
size, type, and environmental conditions and uses these costs to develop appropriate design and O&M
costs. The Agency then uses the number of like sites in each state to calculate total installation, design,
and maintenance costs for that type of site. Finally, EPA aggregates the site costs into size and type
categories to create an estimate of total installation, design, and O&M costs for each state by size of site
and type of land use. See the Technical Development Document (U.S. EPA, 2004) for more detailed
information on these calculations.
Thus, EPA's engineering costs are initially developed as total costs on a per-state basis for up to
24 in-scope models per state based on four land use types and six site sizes (0.5-, 3-, 7.5-, 25-, 70-, and
200-acre sites). Due to data limitations, EPA cannot fully develop state-specific economic models. EPA
does account for state-by-state differences in costs to some extent. For Option 1, in which costs per acre
are relatively low and do not vary significantly by state, EPA calculates the weighted average per-acre
costs by site size and construction type across all states. Options 2 and 4 posed more issues to consider.
Option 2 has two components—inspection and certification and codification of EPA's CGP. Option 4
has one component—codification of EPA's CGP. All sites greater than 5 acres would be subject to these
two options, but a large portion would not be affected by the CGP codification provision. These sites are
in states deemed to have equivalent requirements to EPA's CGP (the "equivalent" states). About one-
third of all acreage developed and subject to Option 2 or 4 is located in equivalent states. Another two-
thirds is located in states considered "nonequivalent" since their requirements do not match EPA's CGP
requirements. Some analyses of Options 2 and 4, therefore, use two costs—costs per acre developed and
subject to the option and costs per CGP-affected acre. Additionally, for Option 2 only, inspection and
certification costs are calculated over all acres developed and subject to Option 2. No states are
considered to have requirements equivalent to the inspection and certification provisions in Options 1 and
2. The costs per acre associated with inspection and certification provisions are added to the costs of the
CGP components per CGP-affected acre in the nonequivalent states for Option 2.
Section 4.3.1 discusses the estimates of numbers of acres developed annually. It also presents the
numbers of CGP-affected acres, which are developed within the engineering cost models using EPA's
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assessment of state equivalency and other factors. The average per-acre costs by site size and type of
construction across all developed acres and across CGP-affected acres are presented in Chapter Five.
4.1.3 Overview of the Economic Models and Their Use of Engineering Costs
EPA undertakes a number of different impact analyses in this EA, each one measuring a different
aspect of impact that might be associated with options considered for the Final Action. These impacts are
divided into two major groups: impacts on the individual projects and firms in the C&D industry and
impacts at the national level, including national level costs to industry. See Figures 4-la and 4-lb for a
diagram of the inputs and outputs for each analysis undertaken in this EA. These figures also show where
outputs from one analysis become inputs to another. The following discussion highlights the various
analysis components illustrated in Figures 4-la and b.
These analyses are all standard analyses EPA has used many times before to analyze other ELGs.
The project-level analysis uses cash flow models that are similar to EPA's analysis of enterprises in the
EA for the Concentrated Animal Feeding Operations ELG (U.S. EPA, 2002b). The firm-level analyses
are similar to those used for the Metal Products and Machinery ELG (U.S. EPA, 2003), and EPA's partial
equilibrium modeling approach is consistent with approaches used to analyze the Iron and Steel ELG
(U.S. EPA, 2002c). None of the modeling approaches has changed substantially from proposal, but EPA
has described more clearly how the models fit into systems of models and has named those systems to
provide more clarity.
4.1.3.1 Industry-Level Analyses
EPA undertakes two analyses at the industry level-an analysis of impacts on C&D projects and
an analysis of impacts on C&D firms (see Figure 4-la). The methodologies for these industry-level
analyses are presented in Section 4.2.
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Cost input;
average $/acre x
size of project
Project Level-
C5.D Pio|-Tt
C&D/PrMS
Cost Input;
Firm Level;
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C&D/FrMS
Figure 4-1 a. industry-Level Analysis
Outputs:
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Cost Input
B
Outputs:
A i 11 i'.u. na i itio-.
# of firms in financial distress
# of potential employment effects
ratio of compliance cost to assets
(barrier to entry analysis)
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„ Cost input
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I
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Total
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Government
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CAD
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Module 5
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lolal social copts
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Cost to government
Deadweight loss
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4.1.3.1.1
C&D Project Model System
EPA's C&D Project Model System (C&D/PrMS) is composed of a various models representing
C&D projects (the model projects), each simulating the cash flow of a C&D project for a certain site size
and land use type. The cost inputs to the C&D/PrMS are the per-acre costs by land use and project size.
These costs are derived by dividing the costs estimated by EPA engineers by the estimated numbers of
acres developed annually and subject to the options, averaged across the 50 states as described in Section
4.1.2.6. When EPA inputs these costs into the C&D/PrMS, it can compute impacts for a wide variety of
construction projects. For each type of construction project and each site size, the project cost per acre is
input into a model that simulates all of the construction costs for that model project. EPA develops a total
of 24 model projects. These projects match the four land use types and six site sizes (0.5-, 3-, 7.5-, 25-,
70-, and 200-acre sites) used in the engineering models, as described in Section 4.I.2.6.2 EPA also
develops an additional, simplified highway construction project model.
The per-acre costs are multiplied by the acreage associated with the site size (e.g., 7.5 acres is the
acreage at a 7.5 acre site) to estimate a cost per site. The increased cost affects other cost items in a model
project. These effects can be measured as either a change in the builder's asking price for a new house or
a change in the profitability of the project. The model also outputs multipliers that are used in other
analyses. These multipliers can be used with the cost per acre to create 1) the costs per acre plus
opportunity and interest costs per acre (costs associated with self-financing or loans due to increased
compliance costs) and 2) costs per acre plus all additional components (opportunity costs, interest costs,
profit, and overhead) that contribute to the final asking price changes.
Section 4.2.1 provides more detailed information on how the engineering costs are used to
determine impacts on projects. This section includes a description of the C&D/PrMS and the model
projects, the C&D/PrMS analysis methodology, data sources, and assumptions used in the analysis. The
project-level results are presented in Chapter Five, Section 5.3.
2The 0.5-acre site size is no longer used in the analysis because none of EPA's final options apply to sites
of less than an acre, leaving 20 active model projects.
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4.1.3.1.2
C&D Firm Model System
EPA's C&D Firm Model System (C&D/FrMS) is composed of a number of model C&D firms.
Each model simulates the income statement and balance sheet for a C&D firm of a certain size (measured
as numbers of starts or units per year) and land use type. The cost inputs to the C&D/FrMS are the per-
acre costs calculated for developed acres (Option 1 and inspection and certification component of Option
2) or CGP-affected acres (the CGP component of Options 2 and 4) (see Section 4.1.2.6). EPA breaks out
costs to estimate costs per acre across states deemed not to have requirements equivalent to Option 4 or
the CGP component of Option 2. Acres developed in nonequivalent states are used with these costs.
Acres developed in all states that are subject to the options are used to analyze Option 1 and the
inspection and certification requirements of Option 2. This approach allows EPA to better estimate the
number of firms that might experience financial stress under Option 2 or 4, depending on whether they
are located in a high-cost or low-cost state.
The costs are used by the C&D/FrMS to compute impacts at the level of the construction firm.
Costs per acre by site size are multiplied by the number of acres per construction start and the number of
starts assumed for each model firm to estimate a compliance cost for each firm. Each of the four types of
firms (single-family, multifamily, commercial, and industrial construction firms) are investigated (a
highway construction firm model is also developed). The firm costs are used in the C&D/FrMS to yield
information on changes in firm-level financial ratios. These changes are then used to determine numbers
of firms that could experience financial stress as a result of incremental option costs and numbers of
employees at firms potentially experiencing financial stress. These costs can also be compared to total and
current assets of the model firms to determine if a barrier to entry by new firms might be present. Later,
in Chapter Six, these firm-level costs are also used to determine impacts on small businesses.
The detailed methodology for the firm-level analysis is provided in Section 4.2.2. This section
includes a description of the model firms, the C&D/FrMS analysis methodology, data sources, and
assumptions used in the model firm analysis. The firm-level analysis results, including those from the
economic achievability, barrier to entry, firm financial stress, and employment effects analyses, are
presented in Chapter Five, Section 5.4.
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4.1.3.2 National Level Analyses
The methodologies for most of the national level analyses are discussed in detail in Section 4.3
and are illustrated in Figure 4-lb. They are divided into several types:
An approach for estimating national compliance costs to industry.
An analysis of the impact on consumers driven by the potential for price increases for
single-family homes.
Analyses using partial equilibrium market models, including those estimating impacts on
the 1) national housing market, 2) regional markets, and 3) the national economy as a
whole. These form three modules of EPA's C&D Partial Equilibrium Modeling System
(C&D/PEqMMS).
An approach for estimating government impacts.
The methodology for estimating total social costs of the options under consideration (which
include compliance costs, costs to governments, and net losses to the national economy) is discussed in
Chapter Eight.
4.1.3.2.1 Total Compliance Cost Model
To compute the total compliance costs to industry, EPA uses the average cost per acre computed
across all developed acres subject to the options (by land use type and project size), adjusted by the
opportunity and interest cost multipliers calculated by the C&D/PrMS. These costs are multiplied by the
number of acres estimated to be developed annually by project size and land use type. When these costs
are aggregated, EPA determines the total cost to the construction industry of each option under
consideration. EPA's Total Compliance Cost Model also calculates costs by industry sector. The total
cost or the total cost by sector becomes an input to many of the remaining national-level analyses.
The detailed methodology is presented in Section 4.3.1. National compliance cost estimates are
presented in Chapter Five, Section 5.5.
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4.1.3.2.2
Consumer Impact Model
The Consumer Impact Model divides the average cost per acre for each site size in the single-
family land use type by the number of lots per acre assumed. These costs are adjusted by the total cost
multiplier, calculated by the C&D/PrMS, to judge the impact of the increase in residential housing price
on an individual home. The model calculates the change in income that would be needed for a
homebuyer to qualify for a home mortgage at the new price. It also calculates the number of households
that no longer qualify for a house at that price, assuming standard lending practices.
The detailed methodology and the data used to create the Consumer Impact Model are presented
in Section 4.3.2. Results of the analysis are presented in Chapter Five, Section 5.6.
4.1.3.2.3 C&D Partial Equilibrium Market Model System
EPA undertakes an analysis of 1) the national housing market and 2) a regional-level analysis of
the markets for single-family, multifamily, commercial, and industrial construction, using partial
equilibrium models of these markets. EPA also determines the net economic impacts in the overall U.S.
economy. These analyses are incorporated into three modules that constitute EPA's C&D/PEqMMS. The
first module, the National Housing Model, uses the total costs for the single-family sector, which is output
from the Total Compliance Cost Model. The second module, the Regional Market Modeling Module,
uses the state-by-state compliance costs per acre for each sector. State-by-state per-acre costs are
calculated by dividing the total costs estimated for each state by the estimate of acreage developed
annually in each state. These two items (costs per state and acres per state) are part of the engineering
outputs described in Section 4.1.2 and the Technical Development Document (U.S. EPA, 2004). The last
component of the C&D/PEqMMS is the Net Economic Impact Model. This module is discussed in more
detail in Section 4.1.3.2.4.
The detailed market model methodologies are presented in Section 4.3.2. In addition, the section
includes a description of data sources and assumptions used in the market models. The market modeling
results are presented in Chapter Five, Section 5.6.
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4.1.3.2.4
Net Economic Impact Model
Compliance costs have a ripple effect on the U.S. economy, resulting in both positive and
negative impacts on production and employment in various sectors, both inside and outside of the C&D
industry. The third module of the C&D/PEqMMS, the Net Economic Impact Model, uses the results of
the partial equilibrium models described above. These results are expressed as changes in industry
output, which are used with economic input-output multipliers developed by the Bureau of Economic
Analysis (U.S. Department of Commerce, 1996) to estimate the broader effects in the U.S. economy.
Where EPA has calculated results for both the national level and regional levels (housing sector only), it
uses the national-level results, since the regional-level data are more limited in scope.
Economic multipliers indicate the degree to which declines in construction activity will have a
ripple effect, causing declines in employment in the construction industry and declines in output and
employment in other industry. Meanwhile, other parts of the economy (e.g., suppliers of ESCs) gain
output and employment. The impacts of compliance are, therefore, measured as both gains and losses in
output and gains and losses in employment across the national economy. These gains and losses generally
balance, but some overall loss to the national economy does occur. This overall loss is called the
deadweight loss, which contributes to the overall social cost of a regulation. The outputs of the Net
Economic Impact Model are the change in employment and output in the national economy and an
estimate of the deadweight loss.
Section 4.3.4 provides a detailed description of the methodology used to estimate the net
economic impacts. In this section, EPA also discusses the approach for assessing regional impacts on the
economy and explains why it did not develop a methodology for assessing impacts on international trade.
The results of the national economic impact analysis are presented in Chapter Five, Section 5.7.
4.1.3.2.5 Government Impact Analysis
EPA estimates government impacts using costs that were derived separately from the costs
discussed in Section 4.1.2. EPA develops government costs by estimating the costs associated with
establishing or modifying permitting programs to reflect any requirements in the Final Action and new or
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increased costs related to permit processing. To these costs, EPA adds an estimate of the costs various
levels of government will incur by complying with the options under consideration (governments at all
levels undertake construction projects). See EPA's Technical Development Document for the proposal
(U.S. EPA, 2002d) for more information. The total costs to government are the administrative costs of
permitting and other activities and the compliance costs estimated to apply to government.
Section 4.3.4 presents the government impact analysis methodology. The results of the
government cost impact analyses are presented in Chapter Five, Section 5.8.
4.1.3.2.6 Estimate of Social Costs
The final analysis EPA performs using the cost inputs calculates total social cost. The total social
costs are derived by adding the total compliance costs to industry, the total costs to government, and the
total deadweight loss (discussed in Section 4.1.3.2.4). The methodology for calculating total social cost
and the results of this analysis are presented in Chapter Eight.
4.2 ANALYSIS OF IMPACTS ON THE C&D INDUSTRY
This section of Chapter Four presents, in detail, the methodologies EPA uses to assess impacts on
the potentially affected C&D industry sectors. The analyses focus on two levels of impacts: the project
level, where increased costs of construction could have the potential to affect either the asking price of
construction or the profitability of that construction, and the firm level, where the aggregate effect of
compliance costs on more than one project could affect the financial health of firms.
These analyses are performed under several different scenarios, reflecting differing assumptions
about who ultimately bears the impacts of the compliance costs. In general, EPA believes that developers
and builders faced with an increase in costs due to new ESC requirements would have an incentive and an
ability to pass on all or some of the increased cost to the buyer. (This is referred to as cost passthrough).
The extent to which the costs can be passed through in practice would depend on market conditions. The
demand elasticity of the buyer (i.e., the sensitivity of the purchase decision to incremental changes in
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price) would be influenced by the magnitude of the cost increase relative to the overall cost of the project
and the availability and price of substitutes. Evidence from the literature suggests that in residential
construction, regulatory-related costs are usually passed on to consumers (e.g., Luger and Temkin, 2000).
This general observation was echoed during EPA's focus group sessions with members of NAHB.
Similarly, EPA believes demand to be relatively inelastic in the other sectors modeled (multifamily
housing, commercial, industrial).
In the C&D/PrMS analyses, EPA has made two different assumptions concerning the extent of
compliance cost passthrough to buyers. EPA analyzes results under the extreme conditions of zero and
100 percent cost passthrough. This bounding analysis enables EPA to examine the impacts under worst-
case assumptions with respect to builders (zero cost passthrough) and buyers (100 percent cost
passthrough) (see Section 4.2.1.3.2 for more detail). These bounding assumptions are not, however,
expected to be accurate. They are used only to determine the maximum impacts to either industry or
consumers, but cannot be used to determine the impacts to both simultaneously. EPA uses what it
considers to be more realistic assumptions in Section 4.2.2 for the firm-level analysis, in which a large
portion of costs are assumed to be passed on to consumers. The results of this analysis at the firm level
are also compared to those estimated assuming zero cost passthrough. In Section 4.3.2, where the effects
on construction markets are investigated using partial equilibrium models, EPA uses the analyses to
determine the "share" of the compliance cost burdens falling simultaneously on industry and consumers.
A more detailed discussion of cost passthrough assumptions can be found in the Economic Analysis of
the proposed rule (U.S. EPA, 2002a).
4.2.1 Methodology for Estimating Impacts on C&D Projects
EPA has analyzed the impacts of the options considered for the Final Action by developing
financial models of representative C&D projects. These models evaluate whether the additional costs of
complying with the options would make the project unprofitable and vulnerable to abandonment or
closure or, alternatively, determine the magnitude of price increases that consumers of construction
products might face. In the absence of an industry survey, the economic models are based on EPA's best
available data and assumptions concerning construction project characteristics. They are designed to
depict, with reasonable accuracy, the change in cash flow for typical projects resulting from compliance
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with the requirements of the options considered. They also reflect the range of C&D projects generally
undertaken by industry participants.
The following sections discuss
The development of the basic structure of the C&D/PrMS, which comprises the project
financial models (Section 4.2.1.1).
The inputs to the C&D/PrMS and EPA's rationale for the selection of the component
model projects (Section 4.2.1.2).
A detailed discussion of the baseline financial conditions that are output by the
C&D/PrMS, with an example of how the modeling system incorporates compliance costs
and calculates impacts (Section 4.2.1.3). This latter presentation is based on a
hypothetical compliance cost, not an actual compliance cost for the sample financial
model. Actual compliance costs (and results) are only shown in Chapter Five (the results
chapter).
4.2.1.1 Development of the Model Structure
The following sections describe the development of 24 model building projects (along with a
simplified nonbuilding construction model). First, EPA discusses the choice of model project types and
sizes. EPA then provides a general overview of how the model projects calculate the impacts of the
options under two cost passthrough scenarios. The section then provides a detailed description of basic
assumptions and data used to develop the general internal structure of each group of models by land use
type.
4.2.1.1.1 Selection of Model Project Types and Sizes
Prior to developing either the engineering or economic models, EPA selected model project types
by analyzing data on the output of the C&D industry. The industry output reflects both the diversity of
the industry and the diversity of the U.S. economy. To illustrate this diversity, EPA notes that the Census
of Construction (U.S. Census Bureau, 2000c) assigns construction projects to one of 17 building and 32
nonbuilding construction categories. In terms of economic value, building construction projects
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accounted for $371.4 billion (97.3 percent of total construction revenues) in 1997, while nonbuilding
construction projects accounted for only $5.9 billion (1.5 percent).3
The largest single category of construction activity was single-family home construction,
accounting for $150.5 billion (39.4 percent of the total). This category was followed by office buildings
at $40.3 billion (10.6 percent of the total), all other commercial buildings at $36.5 billion (9.6 percent of
the total), manufacturing and light industrial buildings at $26.2 billion (6.8 percent of the total),
educational buildings at $25.1 billion (6.6 percent of the total), and multifamily housing at $19.6 billion
(5.1 percent of the total). Based on this review, EPA developed engineering and economic models for
four types of development projects that reflect the range of projects undertaken by the industry and that
would fall within the scope of the Final Action. These projects included:
A residential development of single-family homes
A residential development of multifamily housing units
A commercial development (enclosed shopping center)
An industrial development (industrial park)
Furthermore, for each class of project, EPA developed engineering and economic models that
correspond to a range of project sizes. In each case, there are versions of the model for projects
constructed on 0.5 (labeled 1-acre in the model outputs, but not used), 3, 7.5, 25, 70, and 200 acres. The
combination of four project types and six project size classes results in a total of 24 model projects. As
noted in Section 4.1.2, the engineering costs per acre that are input to the economic models are also
developed for these same 24 projects, although the smallest site size is not currently used in the economic
analysis. Thus 20 active models are in use.
These models, however, account for building construction only. Nonbuilding construction
projects are also potentially affected by the options under consideration. As noted earlier, an estimated
$5.9 billion in nonbuilding construction is undertaken each year. This total represents the value of
highway, road and street construction ($1.6 billion); sewage and water treatment facility construction
($1.7 billion); bridge, tunnel, and elevated highway construction ($587 million); sewer and water main
3 In addition, $4.2 billion (1.1 percent of the total) was not specified by kind.
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construction ($211 million); power and communication line and tower construction ($160 million); and
private driveway and parking area construction ($100 million). While considerable in absolute value, such
nonbuilding construction activity represents less than 2 percent of the total value of construction
completed. Estimates of the land area developed as a result of nonbuilding construction activity are not
available.
EPA has not developed engineering costs applicable to nonbuilding construction projects, due to
the diversity of the activities covered under this category and the relatively small share of overall
construction activity it constitutes.4 EPA, however, has developed a reduced-form model project for
highway construction that operates outside the C&D/PrMS and has analyzed the likely magnitude of the
costs and impacts using this highway model. EPA believes impacts on other linear projects, such as those
for power and gas line installations, would be of similar magnitude. A description of the highway model
analysis is included with the descriptions of the four types of building construction model projects later in
this section.
4.2.1.1.2 Overview of EPA's C&D/PrMS Approach
EPA's models for the 24 building projects that comprise the C&D/PrMS establish the baseline
financial conditions for each representative project by type and size and assess the significance of the
change in project cash flow that results from the incremental compliance costs. The two measures output
by these models are changes in price (derived when EPA uses the assumption of 100 percent cost
passthrough) and changes in profitability (derived when EPA uses the assumption of zero cost
passthrough). EPA can also estimate the number of projects (if any) that become unprofitable under the
latter scenario. Each project's financial characteristics are based on best available data and reasonable
assumptions about development activities and project financing. Two other outputs calculated within
each model project are multipliers that allow EPA to calculate costs per acre plus additional costs, such as
interest and profit, that contribute to the increase in the price of a unit of construction.
4 The national costs of the Final Action, however, do account for the costs borne for these types of projects.
See Section 4.4.
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As explained in Section 4.2.1, the use of two cost passthrough scenarios allows EPA to show the
impacts under worst-case conditions for builders (zero percent cost passthrough) and worst-case
conditions for buyers (100 percent cost passthrough). Under the 100 percent cost passthrough scenario, a
fixed percentage is assumed for the developer-builder's profit margin and the model calculates the final
sales price that each buyer would be asked to pay after the compliance costs have been passed through.
Under the zero cost passthrough scenario, the developer-builder's profit under baseline conditions is
reduced by the compliance costs under each regulatory option. The sales price of each housing unit
remains the same. Section 4.2.1.2 contains further details on the assumed profit levels and other inputs.
The nonbuilding project model, which represents a major highway project, is a simpler model.
This model establishes an average cost per mile of construction. It also estimates the worst-case
compliance costs. Worst-case compliance costs are calculated by multiplying the number of acres
developed in a mile of highway construction—10.67 acres—by the worst-case cost per acre for a 7.5-acre
project among the other construction industry sectors. The 7.5-acre size is the model size closest to the
estimated acreage developed in a mile of highway construction. The model then compares these costs to
the baseline cost of constructing that mile of highway. All impacts are assumed to fall on the project
(zero cost passthrough).
The following section discusses each of the four building project models and the highway model
in more detail.
4.2.1.1.3 Detailed Description of Model Projects
To develop the model projects, EPA focused first on the single-family residential model project.
As noted above, single-family residential construction represents the highest value category of
construction, and information about the C&D process for single-family homes is readily available.5 EPA
was able to develop a relatively detailed model for single-family development and then adjusted the
model parameters as appropriate to reflect differences in the other project categories. In general, EPA
5 EPA was, for example, able to obtain input data for the single-family residential model from
representative members of NAHB. Input from NAHB enabled EPA to identify cost elements associated with each
stage of project development.
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believes that projects in the other categories follow a similar development path and has, therefore, used
the same general structure for all of the models.
Because many of the data elements and modeling assumptions are based on the single-family
residential model, this model is discussed in detail below. Many of the assumptions and data elements
defined for this model were applied directly to or modified only slightly for use in the other models. The
discussion of the other three project types focuses primarily on those assumptions or methods that differ
from assumptions or methods employed in the single-family residential model. EPA's simplified
highway model project, which does not follow the form of the other four model types, is also briefly
discussed.
Residential Single-Family Development
The model single-family residential project, or site, is assumed to be an undeveloped parcel zoned
for single-family residential housing. The number of housing units built depends on the size of the model
project. The location of the site is unspecified and, for this reason, EPA has used national-level data
wherever possible. In this case, the site is assumed to be controlled by a developer-builder (sometimes
referred to in the industry as a merchant builder or operative builder). The developer-builder is
responsible for all aspects of the project, from land acquisition through permitting, subdivision of the
parcel, installation of any ESCs, and construction and marketing of all completed housing units. EPA
recognizes that there are many variations on how a particular site is developed, but believes this model is
representative of a large number of the projects undertaken each year in the United States.6 In effect, this
assumption focuses the impacts of the action on a single business entity. The estimate of impacts is,
therefore, somewhat higher than if EPA had assumed that compliance costs might be shared between a
developer and a builder.
6 Other common scenarios involve the developer selling all or some of the finished lots to builders. The
developer will not necessarily retain lots in the development to complete and sell.
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The starting point for the project is the acquisition of the parcel, which is assumed to be
purchased or optioned from another landowner.7 The C&D process, as modeled, is assumed to proceed
through three phases, characterized as follows:
Land acquisition—The developer-builder puts together the necessary financing to
purchase the parcel. When lenders are involved, they may require certain documentation,
such as financial statements, tax returns, appraisals, proof of the developer's ability to
obtain necessary zoning, evaluations of project location, assessments of the capacity of
existing infrastructure, letters of intent from the city/town to install infrastructure, and
environmental approvals. To satisfy these factors, the developer might incur costs
associated with compiling this data.
Land development—The developer-builder obtains all necessary site approvals and
prepares the site for the construction phase of the project. Costs incurred during this
phase include soft costs for architectural and engineering services, legal work, permits,
fees, and testing; and hard costs, such as land clearing, installing utilities and roads, and
preparing foundations or pads. The result of this phase is a legally subdivided parcel with
finished lots ready for construction.
Construction—The developer-builder undertakes the actual construction of the housing
units. A substantial portion of this work could be subcontracted to specialty
subcontractors (e.g., foundation, framing, roofing, plumbing, electrical, and painting
subcontractors). Marketing of the development generally begins before this phase, thus
the developer-builder could also incur some marketing costs during the construction
phase. Housing units can come under sales agreement at any time prior to, during, or after
completion of construction.
While the length of each phase and the overall length of the project can vary considerably, EPA
assumes, for modeling purposes, that 48 months are needed from acquisition of the parcel through
development and construction. Focus groups arranged by NAHB in Dallas provided estimates that
ranged from 13 to 63 months. EPA acknowledges there will be wide variation in the duration of each
phase—land acquisition, development, and construction—and the duration of the whole project. Several
commenters noted that the three-year timeline used in the EA for the proposed regulation was optimistic.
NAHB felt that a four-year time frame was more typical, based on information they had collected. They
also objected to the concept that a single developer-builder would be involved in all three phases, on
different projects, at the same time. That assumption was invoked to avoid considering cash flows
through the course of the project. Revenues from sales on one project were presumed to offset costs on
7 Options involve payments from the developer to a landowner to secure the rights to develop the land for a
specified period of time, usually while a more complete assessment of project viability is undertaken.
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another. Commenters noted that such cross-subsidy was unusual. The assumption that other projects are
operating in each phase has been replaced in this analysis by the more general assumption that the builder
has access to working capital sufficient to complete the project. The methods used in this analysis do not
distinguish cash flows through time.
EPA currently lacks detailed data on the exact timing of ESC installation during project
development. NAHB commented on timing, but EPA's model is simplified and shows all costs coming
into the model in the first year (although opportunity and interest costs are calculated for a four-year
period). In making this assumption, EPA is overstating the magnitude of the true costs incurred, since
costs incurred in the future would have a lower present value. EPA assumes that ESCs installed to
control runoff during the active phase of construction are put in place early in the development phase and
are maintained throughout the construction phase. Thus, the capital costs for such ESCs would generally
be incurred early in the project, and the structures would be maintained in place for the duration of the
project.8 The costs for removing the ESCs would be incurred at project completion. EPA has also used
the simplifying assumption that the costs for all ESCs are incurred at the beginning of the project. EPA
acknowledges that capital costs would actually be incurred after the start of the project and that, as a
result, the costs would be discounted back to their present value. As noted, however, using the assumption
that all costs are incurred in the first year results in costs being very slightly overstated.
Additional assumptions and sources for data used in the model project analysis are presented in
this section. Each model project is developed using assumptions about the types and magnitude of costs
incurred during various phases of the project, the sources for these funds (i.e., the amounts borrowed
versus the amounts provided from the developer-builder's equity), and the expected developer-builder
profit margins associated with each phase of the project.
Assumptions regarding the various cost elements incurred during each phase of the residential
single-family development are described in detail in Section 4.2.1.2.
8In practice, some ESCs installed to control runoff during the construction phase are then converted to
permanent BMPs to control post-construction flows. These structures would not need to be removed.
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Residential Multifamily Development
The model multifamily residential development is an apartment building or complex. The project
is assumed to be developed in a similar fashion to the single-family model development described earlier.
A single developer-builder is responsible for site acquisition, site preparation, construction, and marketing
of the project, and the project proceeds through the same project phases. Comments received on the
multifamily residential model for the proposed rule suggested that three years was too short a period for
the average development. Commenters suggested using nine years. In response, EPA has extended the
project timeline to nine years. As in the single-family residential model, EPA assumed that the developer
had adequate access to working capital to support the project throughout its duration. Data sources and
inputs specific to the model multifamily development are discussed in Section 4.2.1.2.
Commercial Development
The commercial development is assumed to be an enclosed retail shopping or office area.
Depending on the size of the model project, it could range from a small, stand-alone retail outlet to a
large, enclosed mall or office complex. As with the residential projects, a single developer-builder is
assumed to be responsible for site acquisition, site preparation, construction, and marketing of the project.
The project timeline is assumed to be three years from start to finish, and the project is assumed to
proceed through the same project phases. EPA received no comments on this assumption. Similarly, the
developer-builder is assumed to have several projects underway to help balance cash flows. This
assumption makes it possible to examine the impacts of a three year project on a single year's cash flow
for the affected business. No comments were received on this assumption. Again, the particular data
sources used and inputs to this model project are discussed further in Section 4.2.1.2.
Industrial Development
The industrial development is assumed to be an industrial park or a stand-alone manufacturing
facility. As with the residential and commercial projects, a single developer-builder is assumed to be
responsible for site acquisition, site preparation, construction, and marketing of the project. The project
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timeline is assumed to be the same as for commercial projects (i.e., three years from start to finish), and
the project is assumed to proceed through the same project phases. EPA received no comments on this
assumption. Similarly, the developer-builder is assumed to have several projects underway to help
balance cash flows. No comments were received on this assumption. This assumption makes it possible
to examine the impacts of a three year project on a single year's cash flow for the affected business. A
detailed discussion of data sources and inputs, which are similar to those used for the model commercial
development, can be found in Section 4.2.1.2.
Nonbuilding Development
As noted earlier, nonbuilding construction, such as construction of roads, highways, and bridges,
is a sizeable activity. Overall, however, construction of this type represents less than 2 percent of the total
value of construction completed each year. To assess the potential impacts of the Final Action on such
activities, EPA has developed a model highway construction project and used this model to assess the
Final Action's costs and impacts. EPA believes the model captures and reflects the likely magnitude and
significance of the impacts of the Final Action on the nonbuilding construction sector.
From the highway engineering literature, EPA assumed that the typical four-lane interstate
roadway is configured as follows: two travel lanes of 24 feet each, one 20-foot median between the travel
lanes, and a 10-foot buffer on each side of the highway (Wright, 1996). EPA assumed that the combined
width of the road surface, median, and buffers, 88 feet, represents the typical developed area for new
highway construction. One mile of new highway would, therefore, represent 10.67 acres in developed
area.9
To develop representative baseline costs for the model highway project, EPA examined data from
the Federal Highway Administration's (FHWA's) Highway Statistics publication (FHWA, 2001). Table
FA-10 (Obligation of Federal-Aid Highway Funds for Highway Improvements) of the Highway Statistics
series shows the number of miles, federal funds obligated, and total cost for approved projects
9 The disturbed area is 88 feet or 0.0167 miles wide (88 divided by 5,280 feet). One mile of roadway,
therefore, disturbs 0.0167 square miles, or 10.67 acres (0.0167 multiplied by 640 acres per square mile).
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in a number of highway improvement categories and roadway functional classifications. EPA aggregated
the mileage and cost for new construction, relocation, reconstruction with added capacity, and major
widening for urban interstates and other freeways and expressways. Since highway and road funding can
fluctuate from year to year, EPA estimated the average miles and average cost for the period 1995 to
2000. EPA generated a weighted average cost of $5.4 million per mile (1997 dollars) across all relevant
improvement types and functional classifications.10 EPA related option costs to miles using the maximum
per-acre costs associated with 7.5-acre sites among the other construction sectors. The 7.5-acre site size is
closest to the size of the estimated developed area for a mile of highway. Results are presented as a ratio
of compliance costs to total construction costs for that mile of highway. Further detail on heavy
construction appears in the EA for the proposed rule (U.S. EPA, 2002a). The results of this analysis are
presented in Chapter Five, Sections 5.2 and 5.4.
4.2.1.2 Inputs to the Model Projects
Numerous inputs to the model projects are helpful in constructing baseline financial conditions.
As noted above, the representative model building projects take place in three phases: land acquisition,
site development, and construction. The process of obtaining options on land to be developed (a
common, but not universal step that occurs in the early stages of development) has been combined with
the land acquisition activities for simplicity. Assumptions regarding the various costs that are incurred
during each phase of the project are summarized in Table 4-1.
Overall, EPA has used more than two dozen different modeling parameters, although not all
project types encompass all of these parameters. Because the project location is not specified, national
estimates are used where possible.
For the residential single-family models, EPA turned to data provided by industry. During focus
group meetings in Chicago, participants assisted EPA with identifying ranges for various cost elements
for the hypothetical residential construction project. They also assisted in developing estimates for cost
10 Values were converted to 1997 equivalents using data from Table PT-1 of the Highway Statistics
publication, "Price Trends for Federal-Aid Highway Construction" (FHA, 2001a).
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items such as raw land, engineering, and construction. Some of the estimates proposed during the
Chicago meetings are used in the model projects, particularly where actual national-level data was not
identified. These costs could, therefore, reflect market conditions more prevalent in the Midwest. Table
4-2 presents the assumptions used in the single-family residential model and data sources used. Many of
these parameters remain the same in the other three building project model types. Where alternative
assumptions are used for multifamily, commercial, and industrial model projects, they are also shown in
the table. The EA for the proposed rule contains a similar table outlining the data parameters and sources
for all four model project types (U.S. EPA, 2002a). Although NAHB commented on the anecdotal nature
of the focus group data, with the exception of a few parameters, NAHB did not offer alternative data.
EPA acknowledges the data limitations, but believes it has developed reasonable models with the only
data available.
Table 4-1. Costs Incurred at Various Stages of a Residential Construction Project
Project Phase
Cost Elements
Land Acquisition
• Raw land (purchase or option)
• Interest on land acquisition loan
• Opportunity cost of capital
Development
• Engineering
• Due diligence
• Land development
• Stormwater controls
• Contingency
• Impact fees
• Interest on development loan
• Opportunity cost of capital
• Overhead
Building Construction
• Lot cost (if sold to a builder; includes land acquisition
and development costs and profit to the developer)
• Construction cost
• Builder overhead
• Interest on construction loan
• Opportunity cost of capital
• Real estate and marketing fees
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Table 4-2. Model Parameters and Data Sources
Model Parameter
Source
1,3,7.5,25, size of parcel, in acres
70, and 200
EPA assumption
$40,000 cost of raw land, per acre
Estimate from Chicago focus groups, based on experience of the
Chicago-area participants.
0.33 size of lot, in acres
Census Report C25 (Characteristics of New Housing, 1999) reports a
mean lot size for new single-family homes sold of 12,910 square feet,
which represents a density of close to three lots per acre (evenly
distributed with 1/3 acre lots). (The median lot size is 8,750 square feet,
which implies a density of nearly five lots per acre.)
2.67 approximate density (number
of lots per acre)
Calculated based on impervious surface ratios from "Chesapeake Bay
Watershed Impervious Cover Results by Land Use Polygons" to account
for impervious surface area. The total number of lots (density x site size)
is rounded to the nearest whole number.
$2,500 due diligence costs, per acre
Based on $100,000 in total due diligence costs for a hypothetical 40-acre
development discussed by the Chicago focus group participants.
Participants considered the costs associated with all necessary
environmental and engineering assessments, usually completed prior to
land acquisition. During these assessments, the developer works to
identify any potential future problems or liabilities.
$25,000 land development costs, per lot
Estimate from Chicago focus groups. This figure includes any
construction activities related to land development (e.g., infrastructure
costs).
6% engineering costs, as percent of
land development costs
Estimate from Chicago focus groups.
10% overhead costs, as percent of
development costs
Estimate from Chicago focus groups.
10% contingency, as percent of land
development costs (before
impact fees)
Estimate from Chicago focus groups.
$ 15,000 impact fees, per lot
Estimate from Chicago focus groups.
7% real estate and marketing fees,
as percent of house sales price
Estimate from Chicago focus groups.
2,310 average square footage of new
house
From Census Report C25, which states that the average size of new
single-family homes sold in 1999 and conventionally financed was 2,310
square feet
$53.80 cost of house construction, per
square foot
From NAElB's web site, which shows construction costs for a generic
single-family house are $124,276. $124,276 2,310 sq. ft. = $53.80 per
sq.ft. (NAHB,2001a).
65% percent of total land cost that a
developer can finance for land
acquisition
Loan-to-value ratio as written in the Real Estate Lending Rules.
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Table 4-2. Model Parameters and Data Sources
Model Parameter
Source
75% percent of total development
costs that a developer can
finance for this stage
Loan-to-value ratio as written in the Real Estate Lending Rules.
80% percent of total building
construction cost that a builder
can finance
Loan-to-value ratio as written in the Real Estate Lending Rules.
7.5% loan interest rate for
builder/developer
EPA estimate.
4 term of land acquisition loan,
years (nine years for
multifamily;
three years for commercial and
industrial)
EPA assumption, based on comments received on the EA for the
proposal. Assumes that the land acquisition loan is paid off during the
life of the project.
1 term of development loan,
years
(two years for multifamily;
one year for commercial and
industrial)
EPA assumption. EPA assumes that the land development loan term is
equal to the length of the development phase of the project.
2 term of construction loan,
years
(six years for multifamily;
one year for commercial and
industrial)
EPA assumption. EPA assumes that the construction loan term is equal
to the length of the construction phase of the project.
10%) assumed baseline profit on
land development
Chicago focus group estimated 12 to 14 percent; 10 percent is an EPA
assumption.
10% assumed baseline pre-tax profit
on construction
Chicago focus groups estimated 8 to 12 percent pre-tax at time of sale.
R.S. Means also uses 10 percent as a profit assumption in their Cost Data
series.
4.2.1.3 C&D/PrMS Analysis Approach
This section presents an example of the calculation of baseline financial conditions, using the
residential single-family project encompassing a 7.5-acre site. It also presents the results of a sample
analysis using a hypothetical option cost, showing the impact of this cost on the final price of a single-
family house. In the baseline example, the model project shown defines the baseline financial
performance of the residential subdivision project prior to the promulgation of the Final Action. The
baseline case is assumed to incorporate the costs of full compliance with the existing Phase I and Phase II
NPDES stormwater regulations. The same sample model is then used to assess the incremental impact of
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additional requirements imposed under a hypothetical option. Results using actual option costs for all 20
active baseline models11 can be seen in the Rulemaking Record (DCN 45023). The results using actual
compliance costs for the options under consideration are not presented here. Summaries of the outputs of
the 20 model projects are provided in Chapter Five. The detailed post-compliance results for each model
project, similar to those shown in the example, can be found in the Rulemaking Record (DCN 45023).
4.2.1.3.1 Baseline Model Project Performance
Table 4-3 presents an example of the model project analysis under baseline conditions in the
column labeled "baseline." This column represents the financial conditions for the sample model project
before compliance costs associated with option requirements are added. The example of a single-family
construction project on a 7.5-acre site is used. This baseline example works similarly to the other 19
project models, as shown in DCN 45023. The sample model estimates the final sales price per housing
unit using the assumptions discussed in Sections 4.2.1.1 and 4.2.1.2. The model incorporates built-in
targets for profit margins for both the development and construction portions of the project. The model
also incorporates other assumptions that affect the target sales price for each unit. Using the assumptions
discussed here, EPA calculates the sales price ($316,628) for each unit.
EPA notes that this price is higher than the national mean sales price for a conventionally
financed new single-family housing unit, which was $234,900 in 2000 (FHFB, 2001). EPA attributes the
difference to assumptions in the model that could reflect higher-priced housing markets. It also reflects
the four-year time frame during which opportunity and interest costs accrue (a shorter assumed time
frame leads to lower prices). Despite the potential bias, EPA believes that the model is sufficiently well-
calibrated to allow comparison of the impacts of alternative stormwater control costs on the model project
financials. This sales price is also higher than that calculated by the sample model shown in the EA for
the proposal (U.S. EPA, 2002a). The change in the assumption about length of project (three years was
assumed in the proposal EA and four years is assumed here, based on NAHB comments) causes this
increase in the calculated baseline sales price from that shown at proposal.
"Excluding the results models representing sites of less than 1 acre.
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Table 4-3. Baseline Model and Illustration of Impact of Incremental Option Requirements
on Model Project Under a Hypothetical Option—100 Percent Cost Passthrough
Scenario (Engineering costs and results are only examples)
Project Cost Element
Baseline
Hypothetical Option
Land Acquisition (7.5-acre parcel)
Raw land
$300,000
$300,000
Interest on land acquisition
$29,955
$29,955
Opportunity cost of capital
$16,129
$16,129
Land acquisition costs
$346,084
$346,084
Land Development (7.5-acre parcel)
Engineering
$30,000
$30,000
Due diligence
$18,750
$18,750
Land development
$500,000
$500,000
1 !S(' eimiiiccriim cosis
$0
s4.ij:x
Contingency
$50,000
$50,000
Impact fees
$300,000
$300,000
Interest on development loan
$130,950
$130,950
Opportunity cost of capital
$43,650
$43,889
Overhead3
$59,320
$59,645
Land development costs
$1,132,670
$1,138,880
Land acquisition + land development costs
$1,478,754
$1,484,964
Profit on land acquisition and development
$164,306
$164,996
Total—Land acquisition and development
$1,643,060
$1,649,960
Construction Costs (per lot)
Finished lot cost
$82,153
$82,498
Construction cost
$124,276
$124,276
Interest on construction loan
$32,082
$32,136
Opportunity cost of capital
$8,021
$8,034
Builder overhead3
$15,831
$15,857
Total costs to builder
$262,363
$262,801
Marketing fees
$22,127
$22,164
Profit
$31,610
$31,663
House sales price (calculated)
$316,099
$316,628
liicremeiilal kemilalniA Impacls
(haimc in sales price per lol
$0
$528
Cusis per Im as ".,nf haselme sales price
0.00%
0.17%
Multiplier
0.000
2.144
" Overhead in the development and construction stages is total overhead (based on 10 percent of development or
construction costs) minus the opportunity cost of capital. This calculation was performed to avoid double-
counting of the opportunity cost.
b [Incremental regulatory costs per lot x number of lots] ^ [engineering costs]
Source: EPA estimates. Also see Table 4-2 for model parameters and data sources.
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It is important to note again that while the model recognizes that projects are developed over
time, the model does not fully account for the time value of money. Assumptions have been made
regarding the duration of each stage of development to determine the period for any loans taken on by the
developer (to develop the costs associated with opportunity costs and interest). The durations assumed
are: three years for the land acquisition loan, four years for the development loan, and four years for the
construction loan. These assumptions influence the debt-carrying costs incurred by the developer. What
the model does not account for, however, is the fact that some costs are incurred in years two and three
(e.g., construction costs are incurred in year three). These costs should be discounted back to the base
year, which is the year the project starts. The discount factors for costs incurred two and three years in
the future are 0.873 and 0.816, respectively, assuming a 7 percent discount rate. Any adjustments made
to reflect the time value of money, therefore, would reduce the overall project costs, but only to a limited
degree.
4.2.1.3.2 Results of a Sample Model Project Analysis Assuming a Hypothetical
Compliance Cost
Each of the project models incorporates incremental regulatory costs as illustrated in the sample
model within the shaded lines of the column labeled "hypothetical option" in Table 4-3. As these costs
are added to the other costs incurred during development, the financing requirements in the development
stage increase. Table 4-3 shows the sample baseline project data and illustrates how the project financials
change in response to the hypothetical regulatory costs associated with Option 1. Note, again, that
although the baseline parameters shown in Table 4-3 are those used to generate the model project results
shown in Chapter Five, the engineering costs and results in these tables are included only as examples.
They do not reflect EPA's actual estimated costs and impacts. Summaries of these actual estimated costs
and impacts can be found in Chapter Five. The actual result spreadsheets (formatted similarly to Table 4-
3 for each of the models) are based on the compliance costs for Options 1, 2, and 4 and are provided in
the Rulemaking Record (DCN 45023).
The incremental controls for the 7.5-acre, 20-unit project under the hypothetical option shown in
the example, at a hypothetical cost of $4,928, would raise the calculated sales price for each housing unit
from $316,099 to $316,628, a difference of $528. This represents 0.167 percent of the baseline sales
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price. This price differential is higher than the cost of the option requirements to the builder by a cost
"multiplier" factor. EPA can estimate this multiplier by dividing the calculated increase in house sales
price (from baseline) by the actual per-lot cost of stormwater controls incurred by the builder. Comparing
the $528 per-lot cost passed on to the buyer in this example with the contractor's per-lot cost of controls
(i.e., $4,928 divided by 20 lots equals $246.40), EPA estimates a total cost multiplier of 2.144. EPA uses
a similar approach to calculate a multiplier that accounts for the opportunity and interest cost components
contributing to the price increase. In the example presented in Table 4-3, all costs are passed through to
the buyer (100 percent cost passthrough). These multipliers are used to add other cost components to the
compliance costs per acre, as needed, in the national-level analyses discussed in Section 4.3.
In Chapter Five, EPA presents a summary of actual results for all regulatory options considered
under both the 100 percent and zero cost passthrough assumptions. Under the zero cost passthrough
assumption, the builder absorbs all of the compliance costs for each lot. This impact is reflected in a
decrease in the builder profit. The asking price of the housing unit remains the same as the asking price
in the baseline.
4.2.2 Methodology for Estimating Impacts on C&D Firms
In this section, EPA presents the methodology used to analyze firm-level impacts based on
modeled financial conditions at representative firms in the various C&D industry groups. Section 4.2.2.1
discusses how EPA's system of model firms (C&D/FrMS) was developed, detailing the types and sizes of
model firms EPA selected for use in the C&D/FrMS. Additionally, this section presents an overview of
how the models are used to estimate impacts and describes the data and methods used to construct the
models. Section 4.2.2.2 explains the integration of the compliance costs into the firm models. This
section also discusses EPA's methodology for determining impacts on the financial health of firms.
These impacts include firm financial stress, potential employment effects, and possible barriers to the
entrance of new firms into the industry. Generally, EPA uses establishment data to construct firm-level
data because EPA's data show that in the vast majority of cases, construction firms own only one
establishment (see Chapter Six). For the firm-level analysis discussed in Chapter Four, establishments
and firms are considered essentially the same.
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4.2.2.1 Development of the C&D/FrMS Structure
EPA's C&D/FrMS comprises 14 model firms—six single-family construction firms, five
multifamily construction firms, one commercial construction firm, one industrial construction firm, and
one highway construction firm (the highway sector model is included within the C&D/FrMS). These
model firms are represented financially using simulated income statements and balance sheets for firms
categorized by size and type of construction. The C&D/FrMS uses these model firms and performs an
iterative calculation with the costs for each of the project sizes affected under the options analyzed. The
following sections 1) discuss the selection of each of the model firms by construction type and size, 2)
present a general overview of how these firm models fit into the overall C&D/FrMS structure and what
analyses are performed by the modeling system, and 3) summarize how each model firm's financial
statements are constructed.
4.2.2.1.1 Selection of Model Firm Types and Sizes
EPA selected model firm types and sizes that correspond with the four major building
construction industry groups (residential single-family, residential multifamily, commercial, and
industrial construction) along with the highway construction industry group. The sizes of model firms
that could be constructed were based on either 1) the numbers of houses (starts) or units built by firms in
the single-family and multifamily construction industries, or 2) employment at firms in the commercial,
industrial, and highway construction industry groups. The difference in the basis for developing model
firm sizes is due to the different types of data available for each industry.
For the single-family and multifamily construction industry groups, EPA used data from the
Bureau of the Census (Rappaport and Cole, 2000), which has financial data available for several ranges of
number of starts or units. Using these data, EPA developed six firm sizes in the single-family sector and
five firm sizes in the multifamily sector. For the single-family sector, EPA developed firm models of the
following sizes: one to four starts, five to nine starts, 10 to 24 starts, 25 to 99 starts, 100 to 499 starts, and
more than 500 starts. For the multifamily industry, EPA developed firm models of the following sizes:
two to nine units, 10 to 29 units, 25 to 99 units, 100 to 499 units, and more than 500 units.
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Data of similar detail were not available for the commercial, industrial, or highway construction
sectors. These latter sectors are represented by one model firm each, based on a median employment size
of 50 to 99 employees (U.S. Bureau of the Census, 2000c).
4.2.2.1.2 Overview of the Approach Within the C&D/FrMS
This section provides a general overview of how the C&D/FrMS incorporates the 14 model firms
and how the modeling system uses these model firms to estimate impacts on C&D firms. Further detail
on the construction and operation of the model firms is provided in later sections.
EPA's model firms for each size category are constructed with income statements and balance
sheets that EPA believes are representative of typical firms in the affected industry groups. These income
statement and balance sheet financials include the data that are helpful in calculating key financial ratios.
Financial ratio analysis is the core of EPA's firm-level impact analysis. Financial ratios are used
by analysts to provide insight into the general financial health of firms. These ratios could, for example,
reveal whether the firm is overburdened with debt, providing inadequate return on investment, or
suffering from insufficient liquidity. Typical financial ratios use two or more line items from the income
statement, the balance sheet, or both. The net profit (income) after-tax line item from the income
statement, for example, can be used with the net worth (equity) line item from the balance sheet to
develop a ratio called return on net worth, a measure of whether investment held in the firm (its net
worth) is providing a reasonable return (profit) to the owners or stockholders.
EPA inputs compliance costs to the C&D/FrMS, which changes the values of the financial ratios
calculated from the model firm balance sheets and income statements. In ratios looking at returns, for
example, profits are assumed to decline (due to the imposition of compliance costs), which affects ratios
using profits as a component. The relationships between debt and assets and between total assets and
current assets also change, assuming the firm takes on greater debt to meet option requirements. All of
these types of changes affect the financial ratios that EPA uses to determine impacts.
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The changes that occur in the financial ratios form the basis for three analyses:
An analysis of the change in financial ratios measured before and after the incorporation
of option costs into each model firm's financial statements.
An industry-based benchmark approach that EPA uses to estimate the number of firms
incurring a change in financial health that might make them vulnerable to financial stress.
EPA uses this result, in turn, to identify the potential for employment effects. Note,
however, that in this analysis, financial stress does not directly imply closure, which is
the most extreme response to financial stress. It indicates only that the firm is likelier to
need to make changes to its operations to accommodate changing business conditions
than a firm not estimated to experience financial stress. Effects on employment will only
occur to the extent that firms downsize or close. Even in the case of downsizing or firm
closure, however, employment effects are likely to result in a relatively rapid shift of
work from one firm to another. Employees in the C&D industry are quite mobile and
have transferable skills. Firms that remain open might need to add labor to install and
operate ESCs (see Section 4.3.3).
An analysis comparing compliance costs to assets, allowing EPA to determine if new
construction firms might face barriers to entry.
The first two analyses are undertaken for two cost passthrough scenarios. The focus of the firm
analysis is on the firm alone (impacts on consumers were explored using the C&D/PrMS and will be
further explored in the national-level analyses discussed in Section 4.3). EPA is, therefore, investigating a
cost passthrough scenario in which the firms absorb all of the compliance costs of the options considered
(the zero cost passthrough scenario). EPA is also using a scenario in which the firms absorb a portion of
the compliance costs (partial cost passthrough scenario). In this way, EPA models a worst-case scenario
(zero cost passthrough) and a more likely scenario (partial cost passthrough). The 100 percent cost
passthrough scenario is not analyzed because complete, or 100 percent, cost passthrough implies no direct
impacts on the firm.
EPA's partial cost passthrough scenario is based on literature reviews, industry focus group input,
and econometric evidence, which indicate that the level of cost passthrough from firms to customers is
high in the construction industry. EPA used a market model approach to estimate cost passthrough
(i.e., the ratio of the increase in market price to incremental compliance costs) for each of the four
construction sectors analyzed (see Section 4.3.2). EPA's estimates of cost passthrough using these market
models, range from a low of 84 percent for the industrial construction sector to a high of 91 percent
for the commercial construction sector. The single-family and multifamily construction sectors
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are both estimated to pass through approximately 86 percent of costs (see DCN 45029 in the Rulemaking
Record, which shows the calculation of these results). Assuming positive cost passthrough, builders incur
compliance costs multiplied by one minus the cost passthrough percentage; the remaining costs are passed
through to customers in the form of higher prices.12
4.2.2.1.3 Construction of the Model Firm Balance Sheets and Income Statements
This section presents the data used to construct the model firms and discusses the development of
balance sheet and income statement information that characterize the financial conditions of model firms.
Sources of Data for Constructing Model Firms
EPA began the construction of the model firms by identifying data to characterize the typical
financial conditions of model businesses in the C&D industry. These data are used to develop financial
models of a number of representative firms, which in turn are used to analyze the impacts of the
regulatory options on firm financial conditions.
For the residential construction sector, the Bureau of the Census recently published a profile of
the residential homebuilding industry that allows analysts and others to examine firm financial data in
new ways (Rappaport and Cole, 2000). In particular, the study presents firm financial data by size of
builder, where the builder's size is defined in terms of the number of housing units completed (previously
such breakdowns were available only on the basis of employment size or revenue size). EPA also
obtained the average value of construction work (revenues) completed by builders of various sizes, based
on the number of housing units started in 1997 (U.S. Bureau of the Census, 2000c). EPA used these
profiles as a first step in developing financial snapshots of typical residential home builders, both single-
family and multifamily.
12 Assume, for example, that the market analysis shows that housing prices increase by $0.80 of every
dollar in increased construction costs per unit built. In this case, the cost passthrough is 80 percent. If the Final
Action adds $200 in construction costs per house, the builder incurs impacts from $40 in increased costs not offset
by increased revenues [(1 - 0.8)*$200], while the buyer pays an additional $160 (0.8*$200) for the house.
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The Bureau of the Census' special study (Rappaport and Cole, 2000) does not cover the
commercial and industrial building construction sectors or highway construction. EPA, therefore, used
1997 Census of Construction data (U.S. Bureau of the Census, 2002b) to provide revenues by
employment size class, the first step in building model firms for these sectors.
The next step involved combining the average construction revenue data for builders with more
detailed financial data on the homebuilding industry from Dun and Bradstreet's 1999- 2000 Industry
Norms and Key Business Ratios (D&B, 2000). This document provided data on the balance sheet and
income statement for a typical firm in the following four-digit SIC industry group:13
• Single-family residential construction (SIC 1531).
• Multifamily residential construction (SIC 1522).
• Manufacturing and industrial building construction (SIC 1541).
• Commercial and institutional building construction (SIC 1542).
• Highway and street construction (SIC 1611).
The D&B balance sheet and income statement for the typical firm in each industry group were
scaled to the size of each builder in the census profile (for the residential construction sectors) or the 1997
Census of Construction median firm (for the commercial, industrial, and highways sectors).
Development of Balance Sheet and Income Statements for Model Firms
EPA used two distinct methodologies for constructing balance sheets and income statements for
model firms: one for single-family and multifamily construction firm models and one for commercial,
industrial, and highway construction firm models.
Table 4-4 illustrates the methodology used to construct the single-family and multifamily firm
models. It presents a sample balance sheet and income statement for a model firm EPA developed to
13 Although most of the data used in this EA is reported on a NAICS basis, the most recent D&B report still
uses the SIC system. EPA believes the SIC-based data from D&B can be applied to the corresponding NAICS
industries groups, as there is a high degree of overlap in the industry definitions.
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represent a firm in the single-family residential construction sector that builds 10 to 24 houses per year,
one of 14 such model firms within the C&D/FrMS.
Table 4-4. Model Single-Family Residential Construction Firm Financial Data
Line Item
Dollars
Percent
Assets
1
Cash
$163,390
11.9%
2
Accounts Receivable
$122,199
8.9%
3
Notes Receivable
$9,611
0.7%
4
Inventory
$417,399
30.4%
5
Other Current
$303,438
22.1%
6
Total Current Assets
$1,016,037
74.0%
7
Fixed Assets
$216,938
15.8%
8
Other Non-current
$140,049
10.2%
9
Total Assets
$1,373,023
100.0%
Liabilities
10
Accounts Payable
$112,588
8.2%
11
Bank Loans
$23,341
1.7%
12
Notes Payable
$201,834
14.7%
13
Other Current
$391,312
28.5%
14
Total Current Liabilities
$729,075
53.1%
15
Other Long Term
$162,017
11.8%
16
Deferred Credits
$10,984
0.8%
17
Net Worth
$470,947
34.3%
18
Total Liabilities & Net Worth
$1,373,023
100.0%
Operating Income
19
Net Sales
$1,987,009
100.0%
20
Gross Profit
$453,038
22.8%
21
Net Profit After Tax
$23,844
1.2%
22
Working Capital
$286,962
--
Sources: D&B (2000); U.S. Census Bureau (200c); CCH (1999)
To construct these data, EPA first obtained the revenue figure (shown as $1,987 million in net
sales) directly from the census profile data for a firm in the 10 to 24 starts grouping. Next, EPA
calculated the ratio of total assets to revenues (net sales) for the D&B typical firm's balance sheet for SIC
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1531. This ratio was used to determine total assets (and therefore total liabilities and net worth), using the
census profile value for revenues. The dollar value of the remaining line items were based on their
relationship to total assets, total liabilities, and net worth or net sales, using the percentages in the right
hand column of the table. These percentages were derived from the D&B data for typical firms in each of
the industry sectors.
In the example shown, the D&B ratio of total assets to net sales is 0.691. Thus, if net sales for
D&B's typical firm is $1,987 million, then total assets are $1,373 million ($1,373 million equals $1,987
million multiplied by 0.691). After total assets are estimated, all other asset and liability line items can be
calculated using each line item's percentage to total assets, liabilities, or net sales. These percentages
were calculated using the D&B data. In this example, the model firm holds $163,000 in cash, based on
the fact that cash constitutes 11.9 percent of total assets in the D&B data. This same method was used to
create the balance sheets and income statements for the other firms in the single-family and multifamily
residential construction sectors. See DCN 45031 for the balance sheets and income statements for all 11
of the residential building construction firm models EPA developed.
EPA conducted an alternative analysis to construct models for the commercial, industrial, and
highway construction sectors because available data was limited for these sectors. For each of these
sectors, EPA first determined the employment class corresponding to the median-sized firm in terms of
revenues (U.S. Bureau of the Census, 2000c). This employment class became the basis for a single model
facility for each sector. For each sector, EPA also identified the aggregate total revenues, employment,
and costs associated with the 50 to 99 employee class of establishments. EPA then divided census total
revenues, employment, and costs by the number of establishments in that class, by sector, to characterize
the model firm. Average firm net sales (revenues), calculated in this manner, are used as the starting
point for developing the D&B typical firm balance sheet and income statement. Average revenues and
employment are also used to project the impacts of the options. See DCN 45031 for the balance sheet and
income statements EPA constructed for commercial, industrial, and highway construction model firms.
EPA solicited comments on its use of these median firms for modeling purposes. Although commenters
would have preferred to see impacts on a range of different sized firms, they generally agreed that the
median firm was more representative of existing conditions than the mean firm.
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4.2.2.2 C&D/FrMS An alysis Approach
This section explains the methodologies for inputting compliance costs into the C&D/FrMS,
assessing potential regulatory impacts in terms of changes in model firm financial ratios, extending these
measures to the assessment of firm financial stress and any potential employment effects, and determining
the potential for the various regulatory options to create barriers to entry for new firms.
4.2.2.2.1 Incorporation of Compliance Costs
EPA estimated engineering compliance costs, based on project size, type of construction, climatic
region, state, and other characteristics (see Section 4.1.2). These costs were provided to EPA economics
staff by EPA engineers and converted to weighted average costs per acre by type of construction (e.g.,
single-family) and size of project (acreage). To determine the costs for each model firm in each
construction sector, EPA converted the costs per acre to costs per firm based on the following formula:
costs per establishment = (costs per acre) x (acres per start) x (starts per establishment)
The C&D/FrMS applies an interactive process to progress all model firms through a series of
assumptions about project size. This process enables EPA to address each project size for a particular
land use type within each firm model for that particular land use type. In one such iteration, for example,
the C&D/FrMS applies the cost per acre for a 7.5-acre project, multiplying this cost by 0.3 acres per
house and the number of starts (houses) assumed for each specific single-family construction firm model
(the midpoints of the size ranges). In the next iteration, 25-acre project costs are applied. Other iterations
follow accordingly. Once impacts are tallied for each iteration, the C&D/FrMS makes adjustments to
account for the proportion of projects of any one size that are undertaken annually. These adjustments are
discussed in Section 4.2.2.2.3.
For the single-family residential, commercial, and industrial construction sectors, the estimated
number of units started per firm is essentially identical to the number of buildings started. For the
multifamily residential construction sector, however, the Census Bureau reports the number of units
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started, but each building contains a number of units. EPA used the estimate that the average multifamily
building contains 10.8 units, therefore, to convert units started to buildings started (see Section 4.3.1.2 for
a description of the number of units per building calculation). EPA used the midpoint of each range with
the 10.8 units to estimate the number of buildings. In the 2 to 9 unit size group, for example, EPA
assumed that one building would be constructed, and for the 25 to 99 unit group (midpoint 62), EPA
assumed six buildings would be constructed.
EPA used a variety of sources to estimate average acres per start. For single-family residential
construction, EPA based its estimate of acres per start on the median lot size from the Census Bureau's
Characteristics of New Housing report (U.S. Census Bureau, 2000a). For the multifamily residential,
commercial, and industrial sectors, EPA combined data on the typical "building" footprint from R.S.
Means (2000) with the ratio of building footprint to site size from the Center for Watershed Protection
(CWP, 2001) to estimate average acres per start (see Section 4.3.1.2).
For the model highway and street construction contractor, EPA used data on highway
construction costs from the 1995 through 2000 editions of the Federal Highway Administration's
(FHWA's) Highway Statistics publication. EPA also used 1997 Census data (U.S. Census Bureau,
2000c) to construct a model highway and street construction firm based on median revenues for firms in
NAICS 234110. To estimate the number of acres developed and, hence, total firm compliance costs, EPA
estimated miles of highway constructed per year. It did so by dividing model firm revenues by the
estimated cost per mile constructed, $5.4 million, which was derived in Section 4.2.1.1.3. EPA estimated
that one mile of highway construction involves, on average, 10.67 acres of land (calculated from Wright,
1996).
The compliance costs developed for each model firm were then used to alter the baseline financial
information in the model balance sheets and income statements. The next section discusses financial line
items changes that occurred as a result of the input of compliance costs.
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4.2.2.2.2
Financial Ratio Analysis
For each model firm, EPA examined the economic impacts of each regulatory option on four
different financial ratios: 1) gross profit, 2) current ratio, 3) debt to equity, and 4) return on net worth.
Industry publications cite these financial ratios as particularly relevant to the construction industry (Kone,
2000; Benshoof, 2001). Two of the ratios are based on operating income (gross profit and return on net
worth) and two are based on the balance sheet statement (current ratio and debt to equity).
Few financial ratios, however, have clearly defined critical values that indicate whether a firm is
performing well or poorly. Furthermore, analysts often find that a firm can perform well in one financial
category (e.g., debt management), yet poorly in another (e.g., rate of return). Lacking such hard and fast
rules for interpreting financial ratios, analysts tend to emphasize trends over time, comparisons among
competitors, or comparisons between industries, rather than a single critical value for any particular ratio.
An approach EPA has used in the past to analyze impacts from other ELGs employs Altman's Z-
score (Z' or Z") (Altman, 1993). Altman's Z-score is a multidiscriminant analysis (similar to a regression
analysis) used to assess bankruptcy potential. The Z-score equation analyzes a number of financial ratios,
simultaneously, to arrive at a single number to predict the overall financial health of a firm. In effect, it
applies empirically derived weights to several financial ratios. Unfortunately, Altman derived the
equation for Altman's Z using specific data from the manufacturing sector. Altman developed two
modified versions of the original model to evaluate privately held firms in the manufacturing sector (Z')
and the service industry sector (Z"). After careful evaluation, EPA determined that Altman's Z, Z', or Z"
should not be used with the construction industry, because the equations Altman developed are based on
empirical data specific to the manufacturing and service sectors (Altman, 1993). There many differences
between the ratios and weights used in the manufacturing sector equation and those in the service sector
equation, indicating that the ratios and their weights might be very different for construction sector
equations.
To contend with the difficulty of judging financial health from several ratios, EPA has chosen
two approaches to assessing impacts on existing firms. The first approach presents the post-compliance
changes in four financial ratios, each considered separately from the others. This method does not
attempt to identify firms that might face financial stress due to the regulatory options considered. The
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second approach compares the changes in the four ratios against ratios considered "low" for each affected
industry sector to determine whether firms might experience financial stress. In this analysis, lacking data
on the relative weights of the ratios used, EPA gives each ratio equal weight. EPA averages together the
probability of financial stress, estimated separately for each ratio, at the end of the process. See Section
4.2.2.2.3 for more information on the averaging of probabilities.
Table 4-5 presents the four ratios examined for this analysis and a brief description of each one.
More detailed information on the financial ratio analysis can be found in the EA of the proposed rule
(U.S. EPA, 2002a).
The changes in the financial ratios triggered by compliance costs are also shown in Table 4-5.
Compliance costs reduce gross profit and net profit after taxes. Compliance costs also have an effect on
balance sheet items, but these effects are more complex. EPA assumes that construction costs, including
compliance costs, are typically financed with a short-term construction loan. The value of the loan tends
to be approximately 80 percent of the value of the project, with the developer providing the remainder of
the capital. The loan reduces current assets by the amount of capital the builder is required to pay, but
increases noncurrent assets by the total value of the project; total debt is increased by the amount of the
loan.
EPA provides an example of how a model's financial ratios change from baseline to the post-
compliance scenario. Table 4-6 shows sample results for a firm in the single-family residential
construction industry (SIC 1531) completing between 10 and 24 housing starts per year, based on costs
for 7.5-acre projects. The results are generated under an assumption of zero cost passthrough. Thus, this
table only presents one of the many model results generated by the C&D/FrMS, as it shows only one size
firm and one project size assumption (7.5-acre). Detailed results of each model firm with all project size
assumptions are provided in the Rulemaking Record (DCN 45029). In this example, impacts are most
severe on the return on net worth ratio, a recurring outcome throughout EPA's firm-level analysis. Return
on net worth is the most sensitive ratio because it is based on net profit after taxes, which makes up only
1.2 percent of gross revenues for the typical establishment in SIC 1531 (according to D&B data). Impacts
are much lower on the other financial ratios.
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Table 4-5. Financial Ratios — Baseline and Post-compliance Equations
Financial
Ratio
Baseline Equation
Post-compliance Equation
Gross Profit
gross profit ratio
gross profit _ (net sales - operating costs)
net sales
net sales
gross profit ratio
(net sales - operating costs)
net sales
Return on Net
Worth
^ net profit after tax
return on net worth = -
net worth
return on net worth
(net profit after tax - post-tax compliance costs)
net worth
Current Ratio
current ratio
current assets
current liabilities
current ratio
(current assets - 0.20 x pretax compliance costs)
current liabilities
Debt
Management
debt to equity ratio
total debt
owner equity
debt to equity ratio
(total debt + 0.80 x pretax compliance costs)
net worth
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Table 4-6. Sample Results Showing Impact of Regulatory Options on Financial Performance
for a Single-family Residential Construction Model Firm, with 7.5-Acre Costs, in
the 10 to 24 Housing Units Starts Class
Impact
Regulatory Option
Option 1
Option 2
Option 3
Option 4
Cost Impact
Incremental Cost per Acre per Year
$113
$616
$0
$505
Incremental Costs per Establishment per Year
$14,408
$78,540
$0
$64,388
Impact on Financial Performance
Gross Profit Ratio
Percent change from baseline
0.23%
-0.14%
0.23%
-0.75%
0.23%
0.23%
-0.61%
Return on Net Worth
Percent change from baseline
0.05%
-1.55%
0.05%
-8.43%
0.05%
0.05%
-6.91%
Current Ratio
Percent change from baseline
1.39%
0.01%
1.39%
-0.07%
1.39%
1.39%
-0.05%
Debt to Equity Ratio
Percent change from baseline
1.92%
0.06%
1.92%
0.30%
1.92%
1.92%
0.25%
Note: Stormwater control costs reflect a 7.5-acre site.
Source: EPA estimates based on the methodologies presented in Chapter Four.
EPA presents the changes in ratios from baseline to post-compliance for the regulatory options
under consideration in Chapter Five, Section 5.4. EPA's method for comparing the changes in ratios with
industry "benchmarks" to determine financial stress is discussed in the following section.
4.2.2.2.3 Analysis of Firm Financial Stress and Potential Employment Effects
EPA extended the model firm framework described above to estimate firm financial stress and the
employment effects that might result from the Final Action.14 This section discusses EPA's
14For the proposed rule, EPA also developed a cash flow model and constructed a statistical distribution of
establishments around each representative model as a check on the financial ratio-based approach to projecting
establishment closure impacts. This cash flow model allowed EPA to estimate the probability that establishments
would have insufficient cash flow to afford the estimated compliance costs. The methods for this confirmatory
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methodology, which is also based on analysis of financial ratios. Results are reported in Chapter Five,
Section 5.4. First, EPA presents information on how it determined the number of affected firms and
employees for this analysis. Then the Agency discusses the methodology used to determine financial
stress and potential employment effects.
The options analyzed apply to sites of varying sizes. Option 1 applies to sites 1 acre or larger,
while Options 2 and 4 apply to sites of 5 acres or larger and Option 3 (no-action option) applies to all
sites. To accurately reflect the number of entities affected under each option, EPA has adjusted the
closure and employment loss methodology to account for the number of firms affected.
In its special study of the home building industry (Rappaport and Cole, 2000), the Census Bureau
estimates that 50,661 single-family builders start between one and four housing units per year, while
12,708 builders start between five and nine units per year. EPA concluded that builders starting fewer
than five units per year were unlikely to disturb an acre of land in only one project. Some commenters
seemed confused by the difference between total land development and disturbed acreage. Generally, the
disturbed acreage will be much less than the total acreage developed. Those who build one to four houses
per year generally build one house at a time, often on nonadjacent lots. Even if they build four houses as
part of one development, four houses are unlikely to disturb an entire acre. Those starting fewer than 10
units are considered unlikely to disturb 5 acres. EPA further concluded that 1,904 multifamily builders
starting between two and nine multifamily units per year are unlikely to disturb more than 5 acres during
a given project. EA excluded these builders from the universe of firms potentially affected under Options
2 and 4.
EPA also adjusted the number of firms to account for equivalent state programs under the CGP
component of Option 2 and Option 4. In the EA of the proposed C&D regulation, the number of acres
affected by each alternative option differed only by the site size. Proposed Option 1 applied to all sites
and proposed Option 2 applied to sites larger than 5 acres. Costs were reduced by the proportion of
analysis are presented in Section 4.3.2.3 of the EA of the proposed rule and the results are presented in Appendix
5A (U.S. EPA, 2002a). EPA did not run this sensitivity analysis for the Final Action because the results of the
sensitivity analysis upheld the results of the ratio analysis and because the average per-acre costs are similar to those
estimated at proposal.
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development sites in states with equivalent regulations. But costs per acre affected used in the firm
impact models were calculated to be the same throughout the country.
There are significant differences in the number of acres incrementally affected by Option 1, the
CGP component of Option 2, the inspection and certification component of Option 2, and Option 4.
Option 1 affects 2.2 million acres, the inspection and certification component of Option 2 affects 1.8
million acres, and the CGP component of Option 2 affects only 1.2 million acres. Option 4 also affects
1.2 million acres. This difference is the result of excluding sites of less than 5 acres and excluding states
that have equivalent state regulations. Few states have provisions analogous to inspection and
certification requirements, while many have requirements similar to the CGP component of Option 2 and
the requirements of Option 4. Thus, the Option 1 costs are spread across more acres than the Option 4
costs, resulting in divergent costs per acre. Option 2, in a sense, combines Option 1 (at sites of 5 acres or
more) and Option 4. Of the 1.8 million acres affected by Option 2, about 0.6 million acres of this total are
affected only by the inspection and certification component of Option 2. Spreading the total costs of
Option 2 across 1.8 million acres makes the costs per acre appear lower than those for Option 4, although
Option 4 is identical to the CGP component of Option 2.
Ideally, the firm impact models would be adapted to account for each state's unique situation, but
financial information was not available to develop state-specific model firms. EPA was, however, able to
accommodate some of the differences in costs among states. Total counts of construction firms by state
were available (U.S. Census Bureau, 2000). EPA used these data to calculate the number of firms in
states affected by the CGP component and calculate the nationwide proportion of firms by land use type.
This step further reduced the universe of affected firms from the count of firms that only complete
renovations and disturb less than 1 acre or less than 5 acres. EPA used this smaller universe of firms in
CGP-affected states to calculate the impacts of Option 4.
Clearly, Option 2 includes the impacts of Option 4. In addition, in-scope sites in all states would
be affected by the inspection and certification component under Option 2. EPA estimated the costs
associated with the inspection and certification component by subtracting Option 4 costs from Option 2
costs. As there are some efficiencies created by implementing inspection and certification and the CGP
components together, this difference was not equal to Option 1 costs. EPA then converted the inspection
and certification component costs to costs per acre, using the total acreage affected by Option 2. The
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Option 2 impacts were calculated in two parts and added together. In one part, EPA tallied firms that
were estimated to experience financial stress under Option 4. These numbers were then added to the
results of the run that incorporated the additional inspection and certification component costs of Option
2. Those firms affected by Option 2, but not Option 4, were affected only by the inspection and
certification component costs per acre of Option 2. The results of these two model runs were added
together to estimate the total impact of Option 2.
Affected employment is determined in the same manner as affected firms. The Census Bureau's
study reports the number of employees in each housing unit start category, and these numbers are used to
estimate the numbers of employees affected under each option by subtracting the numbers of employees
in the smaller housing unit start categories to eliminate sites not in scope.
The site size adjustment, used to remove sites less than 1 acre and less than 5 acres, was only
made for the residential construction industry groups for two reasons. First, the Census Bureau's special
study, from which EPA identified firms and employment by the number of starts or units, only covers
single-family and multifamily residential construction establishments. Second, EPA believes that
commercial and industrial building establishments are, overall, more likely to disturb 5 acres or more
during the course of each project. Thus, no adjustments were made to the nonresidential building firm
and employment counts on the basis of acreage covered by the options' scopes. Adjustments, however,
were made to account for equivalent state programs. These adjustments were similar to the adjustments
made for residential builders.
Table 4-7 shows the firm count adjustment for each option, based on acres excluded. The first
column in this table is identical to the third column of Table 2-14 in Chapter Two. Table 4-7, however,
removes the special trades sector before EPA makes adjustments to firm numbers on the basis of option
scope. In Table 2-14, the option scopes are shown with and without special trades removed. Special trade
contractors are not analyzed in this EA because EPA believes they will not be affected by any of the
options. First, most of the special trade professionals (such as plumbers and electricians) are unlikely to
disturb 1 or more acres of land. These trades were omitted prior to Table 2-14. Second, the 19,771 firms
in the excavation and demolition sectors (shown in Table 4-7), usually act as subcontractors. EPA
believes that if they do incur compliance costs, they will pass these costs to the general contractor
because subcontractors will note any such requirements while making their bids. If an excavation
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subcontractor, for example, is told to excavate for a swimming pool, this task is accounted for in the bid.
If the subcontractor is told to excavate a sediment pond, the same reasoning applies.
Table 4-7. Number of Firms in the C&D Industry, Adjusted for Regulatory Option
Coverage
Industry
Number of
Firms3
Number of
Firms in
Analysis
Before Site
Size
Exclusions
Option 1
Options 2 and 4
Adjustment
for 1 acre
exclusion
Adjusted
Number
Adjust-
ment for 5
acre
exclusion
Adjusted
Number
Single-family
housing
construction
84,731
84,731
(50,661)
34,070
(12,708)
21,362
Multifamily
housing
construction
4,603
4,603
4,603
(1,904)
2,699
Commercial
construction
39,810
39,810
..
39,810
..
39,810
Industrial
building
construction
7,742
7,742
7,742
7,742
Heavy
construction
42,557
11,270
11,270
11,270
Special trade
19,771
--
--
--
--
--
Total Firms
199,217
148,156
97,495
82,883
" Previously adjusted to remove remodeling establishments and to reallocate land development establishments to
the four building construction sectors. See Chapter Two, Section 2.3.5 for discussion of this adjustment. Also,
see Table 2-14.
Figures do not necessarily add to totals due to rounding.
Source: Rappaport and Cole, 2000; EPA estimates.
Table 4-7 also adjusts the number of firms in the heavy construction sector. The adjusted number
represents the number of firms in the highway construction portion of this sector, which is the only sector
with enough data for analysis. Although commenters noted that this sector was not analyzed
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in detail, they did not submit usable financial data. EPA discusses potential impacts on the rest of this
sector qualitatively in Chapter Five.
Table 4-8 displays the firm count after adjustments are made for state equivalency. The number
of firms that are subject to the CGP component of Option 2 and the requirements of Option 4 is smaller
than the total number of firms in each industry sector.
Table 4-8. Number of Firms in the Construction and Development Industry Adjusted for
State Equivalency for the CGP Component of Option 2 and for Option 4
Industry
Number of Firms
in Analysis3
Option 2 (CGP Component) and Option 4
Adjustment for State
Equivalency
Adjusted Number
Single-family housing
construction
21,362
(5,212)
16,150
Multifamily housing construction
2,699
(619)
2,080
Commercial Construction
39,810
(11,103)
28,707
Industrial building construction
7,742
(1,947)
5,795
Heavy construction (highway)
11,270
(2,834)
8,436
Potentially affected firms
82,883
61,168
a From Table 4-7.
Figures do not necessarily add to totals due to rounding.
Source: EPA estimates.
To project firm financial stress due to the options, EPA first selected a criterion for determining
when a facility is considered "impacted" by an option under consideration. As discussed earlier, financial
ratios rarely have well-defined thresholds that correlate with financial health or stress. In analyzing
previous ELGs (e.g., U.S. EPA, 2003), EPA has defined the critical value for financial stress as the value
of a financial ratio that defines the lowest quartile of firms (i.e., the poorest performing 25 percent of
firms). EPA assumes that a facility is financially stressed if its preregulatory financial ratio lies above the
lowest quartile value, but its post-regulatory ratio falls below the lowest quartile value. According to
D&B, for example, 25 percent of establishments in SIC 1531 have a current ratio less than 1.1, which
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is it the lowest quartile value. If a firm's preregulatory current ratio is greater than 1.1, but its
post-regulatory current ratio is less than 1.1, EPA would classify the firm as potentially financially
stressed, subject to consideration of the other financial ratios, discussed in the next paragraph.
EPA approximated a cumulative distribution function for each financial ratio, using the lower
quartile, median, and upper quartile values from D&B. Figure 4-2 illustrates the current ratio cumulative
distribution function for SIC 1531 (single-family residential construction). The baseline curve represents
the preregulatory cumulative distribution function. This curve indicates that 25 percent of establishments
have a current ratio below 1.1 (1.1 thus becomes the critical value for determining financial stress), 25
percent of establishments have a current ratio greater than 1.1 but less 1.4 (the median), 25 percent have a
current ratio greater than 1.4 but less than 2.9, and 25 percent have a current ratio greater than 2.9. The
cumulative distribution function is assumed to be identical for each size model firm in the single-family
and multifamily housing sectors, although the values of the balance sheet and income statement line
items, used to calculate the financial ratios, increase with model firm size. EPA also constructed
cumulative distribution functions for the debt to equity and return on net worth ratios. D&B does not
provide quartile values for the gross profit ratio. EPA, therefore, could not use the gross profit ratio in the
firm financial analysis.
EPA then estimated the post-compliance cumulative distribution function by calculating the post-
compliance quartile values for each financial ratio, using the post-compliance equations in Table 4-5 and
the estimated compliance costs for the model firm. To estimate the post-compliance financial ratios, EPA
combined relevant model firm line items and each quartile financial ratio values, calculating the value of
other balance sheet line items that would be consistent with each financial ratio value. The current ratio,
for example, is:
. .. current assets I
current ratio = ¦
current liabilities I
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1.00
0.90
0.80
0.70
0.60
!« 0.50
•Si
o
•-
a.
0.40
0.30
0.20
0.10
0.00
0.00
1.00 2.00
3.00 4.00 5.00 6.00 7.00 8.00
9.00
Current Ratio
¦ Baseline
~ Postregulatory
Critical Value
Figure 4-2. Hypothetical Pre- and Post-regulatory Cumulative Distribution Function for
Current Current Ratio, SIC 1531: Operative Builders
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EPA calculated the value of current liabilities, consistent with upper and lower quartile values of
the current ratio, using the following equation:
. , . model firm current assets I
estimated current liabilities = ¦
quartile value of current ratio I
For the model firm represented in Table 4-4, current assets are $1,016 million. If the lower
quartile value of the current ratio is 1.1, then current liabilities of $923,600 are consistent with the current
ratio of 1.1 and the current assets value of $ 1.016 million. The post-compliance value of the current ratio
for this firm would then be calculated by subtracting 20 percent of pre-tax compliance costs from current
assets ($1,016 million) and dividing the resulting value by current liabilities ($923,600).
In the example shown in Figure 4-2, compliance costs decrease the value of the current ratio,
shifting the post-compliance cumulative distribution function to the left. The post-regulatory scenario in
Figure 4-2 is hypothetical and does not reflect actual impacts, which are presented in Chapter Five. DCN
45028 in the Rulemaking Record presents the results of all iterative runs for all models. Using the post-
compliance curve in this example, EPA estimates that approximately 40 percent of establishments now
have current ratios less than or equal to the critical value of 1.1. In this hypothetical example, therefore,
approximately 15 percent of firms in this sector might incur incremental financial stress due to
compliance costs (i.e., 40 percent below 1.1 on the post-regulatory curve minus 25 percent below 1.1 in
the baseline scenario).
Under each regulatory option considered, compliance costs vary with project size (acreage).
Furthermore, even when project size is held constant, financial stress will vary with model firm size
because the average number of projects undertaken in a year differs among model firms. Financial stress
also varies with model firm size because different size model firms have different levels of resources
available to absorb compliance costs. To estimate the number of firms in each sector that would be
financially stressed by an option under consideration for the Final Action, therefore, EPA examined all
combinations of model facility size and project size for each financial ratio.
A firm with a financial ratio that does not meet the "financially healthy" benchmark for a single
measure of financial performance, however, will not necessarily experience financial stress. To assess
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the impacts of the options analyzed, therefore, EPA assumes that the probability of firm stress due to
incremental compliance costs is equal to the average probability of incremental financial stress under each
of the three financial ratios: current, debt to equity, and return on net worth. If the probability of
incurring incremental financial stress, for example, is 15 percent when observing the change in the current
ratio, 10 percent when observing the change in debt to equity, and 5 percent when observing the change
in return on net worth, EPA calculates that the overall average probability of financial stress is 10 percent
for the sector (the average of 10, 5, and 15). In effect, EPA is giving each ratio equal predictive weight.
Multiplying this probability by the number of firms represented by the model firm used for the analysis,
EPA obtains an estimate of the number of firms projected to experience financial stress due to the option
under consideration for that size project and that size model firm. Intuitively, EPA is making an implicit
assumption that a firm that does not meet a benchmark under one ratio also does not meet benchmarks
under the other two ratios. If a firm is not meeting benchmarks under multiple measures of financial
health, it is highly likely that the firm will experience financial stress.15 The potential for employment
effects are estimated by multiplying the number of firms projected to experience financial stress by the
average number of employees per firm. As noted earlier, however, any effects on the group of employees
identified in this manner are likely to 1) not occur at all or 2) involve fairly quick transfer of workers to
projects managed by other, nearby firms. These firms might need to hire additional labor to comply with
ESC installation and maintenance requirements (see Section 4.3.3).
Finally, to project sector-wide impacts under a specific regulatory option, EPA aggregated the
number of firms expected to experience financial stress and the potential employment effects for all
combinations of model firms and project sizes affected by that option. Numbers of firms estimated to
experience financial stress in a single sector were calculated as a sum of the projected numbers of such
firms under each combination of model firm and project size. The numbers of firms are weighted by the
relative frequency of a particular project size among all projects constructed by the sector. Suppose that
15 A strict interpretation of this implicit assumption would result in EPA always selecting the smallest
probability of incremental financial stress from among the three measures. EPA determined, however, that this
method was not analytically desirable because the results would always be determined by the least sensitive measure
of stress. EPA, therefore, selected an average of the three probabilities to measure financial stress rates. Note that,
in reality, a firm might not meet a benchmark under one ratio, but meet one under another ratio. This firm would be
less likely to experience financial stress. It is possible that the set of firms that do not meet the benchmark for the
current ratio, for example, is completely separate from the set of firms that do not meet the benchmark for the debt
to equity ratio. EPA, however, has no information on which to base an estimate of such joint probabilities.
Assuming the sets of firms that do not meet benchmarks are identical under each type of benchmark results in a
more conservative estimate of stress.
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in the single-family housing construction sector, for example, the C&D/FrMS estimates that the
incremental probability of financial stress for firms in the 25 to 99 start class is 0.8 percent for a 3-acre
project under Option 1. Because there are approximately 3,000 firms in this start class, approximately 24
firms are expected to incur financial stress. Three-acre projects, however, account for only about 6
percent of single-family construction. Thus, the weighted number of firms in the 25 to 99 model firm
start class estimated to experience financial stress as a result of undertaking 3-acre projects under Option
1 is 1.4. Similar calculations are performed for all other size model firms for 3-acre projects, and for all
size model firms for 7.5-acre, 25-acre, 70-acre, and 200-acre projects. The weighted number of firms
experiencing financial stress for each combination is summed to project total numbers of firms estimated
to experience financial stress under Option 1. In this calculation, EPA also adjusted the universe of
affected firms to reflect the regulatory coverage of each option, as shown in Tables 4-7 and 4-8.
4.2.2.2.4 Barriers to Entry Analysis
In addition to having impacts on existing firms, EPA regulations can have impacts on new firms.
In some cases, regulations can have an adverse affect on the ability of new firms to compete with existing
firms in an industry, reducing the likelihood that new firms will enter the market. These effects are
known as barriers to entry. Barriers to entry are typically assumed to occur if the cost of complying with
a regulation substantially increases the firm start-up costs. If a rulemaking requires that all facilities
invest substantially in a wastewater treatment system, for example, then an entrepreneur might be
discouraged from starting an enterprise. The increased capital cost serves as a barrier to new entry to the
industry.
The situation in the construction industry is somewhat different. In terms of the capital required
to start a firm, the final action has little direct impact. The final action does not require a firm to purchase
and install any capital equipment, and thus the level of capital expenditures required to start up a firm are
not directly affected by the final action.
Landis (1986; see Section 2.4.1.4.2 for details) identifies two significant barrier to entry classes,
specific to the construction industry, that are not related to capital equipment: 1) entry costs to participate
in a given market (e.g., local development fees or abnormally high land costs) and 2) input cost
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differentials (e.g., the new entrant must pay a higher price for inputs than existing firms). These barriers
to entry, however, also appear to be unaffected by any of the options under consideration. To the extent
that either of these barriers already exist in any given market, they would not be differentially affected by
any of the options considered in EPA's Final Action.
As the model establishment analysis indicates, the options considered might increase borrowing
as firms finance building projects. This could affect a potential industry entrant indirectly, as the new
firm might need marginally more startup capital to obtain the somewhat larger short-term construction
loan required to undertake a project. Once again, however, the new entrant would still face essentially the
same requirements that existing firms face to secure a loan. Thus, new entrants should not be
differentially affected by the options considered in such a way that they would be unable to compete
effectively with existing firms.
To examine the potential for barriers to entry, EPA calculated the ratio of estimated compliance
costs to each model firms's current assets and total assets. If these ratios are small, then EPA concludes
that the option considered would have little effect on the ability of a new entrant to secure financing for a
project. Note that in this analysis, EPA compares total compliance costs to assets. This step probably
overestimates impacts. It is more likely that a new entrant would need to provide only 20 percent of the
incremental compliance costs and would obtain the remaining 80 percent from conventional construction
loan financing sources (see Section 4.2.2.2.2), as would an existing firm.
4.3 NATIONAL-LEVEL COSTS AND IMPACTS
This section presents EPA's methodologies for calculating national-level costs and impacts.
Section 4.3.1 discusses the methodology for computing national compliance costs. Section 4.3.2 presents
EPA's methodologies for using partial equilibrium market modeling to measure impacts on the U.S.
economy. The section also presents EPA's methodologies for 1) measuring impacts on consumers who
purchase single-family housing, 2) determining changes in price and quantity of single-family housing at
the national level due to the options considered, and 3) undertaking a regional market analysis. This last
analysis focuses on all four major construction sectors (single-family, multifamily, commercial, and
industrial) to determine changes in price and quantity for each sector. Section 4.3.3 presents EPA's
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approach for calculating net economic impacts on the U.S. economy. This calculation uses the results of
the partial equilibrium models to identify changes in output and employment and to compute a
deadweight loss to society. Finally, Section 4.3.4 presents EPA's method for calculating impacts on
government agencies. The relationships among these analyses can be seen earlier in this chapter in Figure
4-lb.
4.3.1 Methodology for Computing National Compliance Costs
EPA developed per-acre engineering costs (across all acres developed for Options 1, 2, and 4)16
for four categories of land use (single-family residential, multifamily residential, commercial, and
industrial). Each land use category was also broken into the various project size categories, as discussed
in Section 4.1.1. To estimate the total national costs of the options to the affected C&D industry groups,
EPA first adjusted the per-acre costs to include opportunity and interest costs, because these are
additional costs industry will bear implicitly or explicitly (see Section 4.3.1.1). These costs arise out of
the need for firms to self-finance the incremental project costs (using, for example, working capital)
and/or borrow additional money to cover the added compliance costs. EPA then estimated the numbers of
acres of land developed annually by type of land use and project size (see Section 4.3.1.2). Finally, EPA
aggregated the adjusted per-acre costs for each option across all acres developed annually by land use
type and project size. These costs were summed to produce the total national compliance costs to
industry of each of the options considered (see Section 4.3.1.3).
4.3.1.1 Calculation of Adjusted Per-Acre Costs That Are Used to Compute National
Compliance Costs
As noted in Section 4.1.1.2, the compliance costs developed by EPA's engineers do not include a
variety of costs or items that arise during the C&D process. These costs or items include profit and
overhead, and opportunity costs and interest, all of which can add to the price of construction if costs are
passed through to consumers. The latter two costs are costs that industry bears and should be included in
16Option 3 is the no-action option. In general, the analysis of this option is not discussed, as it is identical
to the baseline analysis.
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an estimate of national compliance costs. Profit, however, does not affect costs to industry. Additionally,
as discussed in Section 4.1, overhead is not affected measurably by the very small, per-project
incremental option costs because most overhead cost items do not change with small, marginal changes in
project costs.
Section 4.2.1 discussed two multipliers that are calculated within EPA's C&D/PrMS. These
multipliers allow EPA to compute a cost per acre for each combination of project size and land use. EPA
can use either a total cost multiplier, which includes all components that contribute to a price increase, or
an opportunity and interest cost multiplier, which only includes the opportunity and interest cost
components. EPA uses the project-specific opportunity and interest cost multiplier with the project-
specific, per-acre engineering costs developed for each model to produce per-acre adjusted costs (by size
and type of project), which are entered into the National Cost Model.
4.3.1.2 Calculation of Number of Acres by Land Use Type and Size
Aggregate costs to the industry are obtained by multiplying the adjusted per-acre costs (see
Section 4.3.1.1) for each land use type and site size by the number of acres estimated to be developed
each year for each type and size.17 A major step of the national-level cost methodology, therefore, is
estimating the numbers of acres developed by land use type and site size. EPA obtained estimates of the
annual, nationwide number of acres developed from the U.S. Department of Agriculture's (USDA's)
National Resources Inventory (NRI). This source does not, however, identify the type of development,
subsequent nature of the land use, or the distribution of acreage by site size.
The following sections describe the four steps EPA undertook to break out the numbers of acres
developed annually by land use type and site size:
17In actuality, these estimates of acreage by land use and size were used first to create the per-acre costs,
using the total costs by site and size that are output by the engineering cost models (see Section 4.1.1). Their use, as
described here, allows EPA to return to total costs after the adjustments to per-acre costs are made using the
multipliers. Note that using costs per acre developed and numbers of developed acres would produce the same result
as using costs per acre affected by CGP codification requirements and numbers of CGP-affected acres. For
simplicity, EPA uses the former to compute total costs for all options.
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Step One—Identifying the nationwide number of acres developed annually, based on
NRI estimates.
Step Two—Distributing the developed acreage estimated in Step One across land use
type.
Step Three—Distributing the acres in each land use type estimated in Step Two across
site size classes.
Step Four—Adjusting the numbers of acres downwards to account for the regulatory
scope of Options 2 and 4. This section also presents the numbers of CGP-affected acres
under Options 2 and 4, although they are not used for computing total compliance costs.
4.3.1.2.1 Step One—Identifying Annual, Nationwide Numbers of Acres Developed
The NRI, a program of the USDA's Natural Resources Conservation Service, is designed to track
changes in land cover and land use through time. The inventory, conducted every five years, covers all
non-federal land in the United States (75 percent of the U.S. total). The program captures land use data
from approximately 800,000 statistically selected locations. From 1992 to 1997, an average of 2.24
million acres per year was converted from nondeveloped to developed status (USDA, 2000).
EPA assumes that some of the 2.22 million acres converted from an undeveloped to developed
status each year would be exempt from the requirements of any of the options considered, due to the site
size being less than 1 acre. Based on the engineering analysis of sites of that size, EPA has reduced the
amount of land subject to active construction controls to 2.18 million acres (U.S. EPA, 2004). Thus, the
2.18 million acres represents EPA's estimate of the number of acres that would be subject to Option 1.
EPA made further adjustments, limiting the acreage to land affected under Options 2 and 4, by removing
the acreage associated with sites smaller than 5 acres.
4.3.1.2.2 Step Two—Distributing Acreage by Land Use Type
The NRI data are not allocated among the land use types used in EPA's analysis. To allocate the
NRI acreage by land use type, EPA estimated the distribution of acres developed by land use type as
follows:
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EPA obtained data relating to numbers of permits issued annually for the various land use
types. EPA was able to obtain data on the number of building permits issued per year for
single-family homes and multifamily projects directly from 1995 through 1997 census
data. Estimates of the number of permits for other types of construction were based on
extrapolations of the number of permits derived from older census permit data.
EPA multiplied the number of building permits issued annually by estimates of the
average site size for each land use type. This calculation produced an estimate of the
number of acres developed annually by land use type.
EPA compared the sum of these estimates of acres developed to the NRI estimates of
land developed annually in the United States and adjusted the estimates of acres by land
use type to reconcile any differences. Finally, EPA allocated the total by type of
construction, site size, and region and adjusted each regional value to an integer to ensure
that only whole sites were considered.
Detailed methodologies for deriving acreage estimates for each of the major land use
types-single-family residential, multifamily residential, and nonresidential construction-are described in
more detail in the subsections below.18 This section concludes with a discussion of how EPA adjusted the
estimate of acres by land use type to match the total acreage developed according to the NRI data.
Single-Family Residential
Census data from 1995 through 1997 indicate that the number of new single-family housing units
authorized has averaged 1.04 million units per year (see Table 4-9). As seen in Table 4-10, the average
lot size for new single-family housing units is 13,553 square feet, or 0.31 acres (1 acre = 43,560 square
feet). If EPA had used the average lot size, however, the total acreage converted for single-family
residential projects could have been underestimated because this acreage does not include housing
development common areas that are not considered part of the owner's lot—streets, sidewalks, parking
areas, stormwater management structures, and open spaces.
18 EPA also estimates acres developed for highway and other nonbuilding construction. EPA, however,
includes these acres in the other land use types because no distinct engineering costs were developed for these types
of construction. This approach leads to the implicit conclusion that compliance costs to nonbuilding construction
will be similar to those for building construction.
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Table 4-9. New Single-Family and Multifamily Housing Units Authorized, 1995-1997
Year
All
Housing Units
Single-Family
Housing Units
Multifamily
Housing Units
1995
1,332,549
997,268
335,281
1996
1,425,616
1,069,472
356,144
1997
1,441,136
1,062,396
378,740
1995-1997 avg
1,399,767
1,043,045
356,722
Source: U.S. Census Bureau, 2000b. Series C40 New Privately Owned Housing Units Authorized.
Table 4-10. Average and Median Lot Size for New Single-Family Housing Units Sold, 1995-
1997
Year
Average Lot Size
(Square Feet)
Median Lot Size
(Square Feet)
1995
13,290
9,000
1996
13,705
9,100
1997
13,665
9,375
1995-1997 avg
13,553
9,158
Source: U.S. Census Bureau, 2000a. Series C25 Characteristics of New Housing.
To account for this additional acreage, EPA examined data obtained from a survey of
municipalities conducted in support of the Phase IINPDES stormwater rule (U.S. EPA, 1999). This
survey identified 14 communities that consistently collected project type and size data as part of their
construction permitting programs.19 EPA reviewed the permitting data from these communities, which
indicated that 855 single-family developments, encompassing 18,134 housing units, were constructed.
The combined area of these developments was 11,460 acres, which means that each housing unit
accounted for 0.63 acres (11,460 acres 18,134 units = 0.63 acres per unit). This estimate (essentially
double the average lot size) appears high and could more than account for the common areas and
19 The communities were Austin, TX; Baltimore County, MD; Cary, NC; Ft. Collins, CO; Lacey, WA;
Loudoun County, VA; New Britain, CT; Olympia, WA; Prince George's County, MD; Raleigh, NC; South Bend,
IN; Tallahassee, FL; Tuscon, AZ; and Waukesha, WI.
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developed areas in a typical single-family residential development. On the other hand, the average lot size
alone clearly understates size relative to developed area. To address these issues, EPA averaged the
census national average lot size estimate of 0.31 acres and the Phase IINPDES stormwater estimate of
0.63 acres per unit to arrive at an estimate of 0.47 acres per unit. EPA then multiplied the 0.47 acres per
unit by the average annual number of single-family housing units authorized by building permits (1.04
million), arriving at an estimate of 490,231 acres developed annually for single-family housing.
Multifamily Residential
EPA's calculation of acreage for the multifamily sector required several steps. First, the Agency
calculated the average number of units per new multifamily building. Then, EPA divided the average
number of units authorized between 1995 and 1997 (356,722, from Table 4-9) by the average number of
units per new multifamily building to estimate the number of sites developed annually. Finally, EPA
estimated the number of acres likely to be developed at these sites.
EPA estimated the average number of units per multifamily building by examining the
distribution of units by unit size class in census data (U.S. Census Bureau, 2000b). The Census Bureau's
report shows the number of units built annually by building size class (2 to 4 units, 5 to 9 units, 10 to 19
units, and 20 or more units).20 EPA estimated the number of buildings in each size class by dividing the
total number of units in each class by the average number of units per building for that size class. In the
10 to 19 unit size class for 1999, for example, the total number of units was approximately 94,000 and the
average number of units per building was 14.5, so EPA calculated 6,483 buildings associated with this
size class. After EPA calculated the number of buildings associated with each size class, the number of
buildings estimated in each size class were summed to estimate a total number of buildings built on
average annually (31,405 buildings). EPA also summed the number of units in each size class to obtain a
total number of units associated with all multifamily buildings estimated to be built annually (338,000
units). EPA then divided the total number of units built annually by the total number of buildings built
annually to estimate the average number of units per multifamily building constructed (338,000 units ^
20 The average number of units was derived using data for 1999 and 2000 because data for prior years was
not available at this level of building size detail.
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31,400 buildings = roughly 10 units/building).21 EPA divided the average number of units estimated to be
built annually from 1995 to 1997 (356,722 units) by the average number of units per building (10 units),
yielding an estimated of 35,672 sites.
EPA's next step was to estimate the number of acres per site associated with the 35,672 sites
developed per year. EPA identified two methods for calculating site size for multifamily developments.
The first method allows EPA to extrapolate from living space estimates to footprint size and then to total
site size. The second approach uses data from the 14-community study, cited earlier.
In the first approach, EPA used data from a report by The Center for Watershed Protection
(CWP), which estimated that multifamily buildings occupy an average of 15.6 percent of the total site
(CWP, 2001). EPA assumed that the average-sized multifamily building (10.8 units) has two floors and
that each unit occupies the national average of 1,095 square feet (NAHB, 2002). EPA thus estimated that
the total square footage accounted for by living space is 11,826 square feet. EPA assumed an additional
amount of space would be required for common areas. EPA selected a factor of 1.2 to account for
common areas and other non-living space (e.g., utility rooms, hallways, stairways). When EPA
multiplied the living space square footage by the 1.2 factor and divided this number by 2, to reflect the
assumption of a two-story structure, an estimate of 7,096 square feet (11,826 x 1.2 2 = 7,096) was
obtained for a typical building footprint. EPA combined this number with the CWP estimate of the
building footprint share of total site size (15.6 percent) to estimate an average site size of 42,485 square
feet (7,096 0.156 = 45,485), slightly more than 1 acre (1.04 acres).
In the second approach, using data from the 14-community study, EPA identified 286 multifamily
developments covering a total of 3,476 acres. The average site size, 12.1 acres, is considerably higher
than that obtained above. EPA had no indication that the permits reviewed in these communities were for
projects of a larger than average size. Lacking a clear indication of how to resolve the wide variation
between the two approaches, EPA decided to select the midpoint of the results obtained using the two
methods. EPA has thus assumed that 6.5 acres is the average site size of multifamily projects. EPA
21EPA uses 10 in this calculation to match the rounding used in the Technical Development Document
(U.S. EPA, 2004). Elsewhere in this EA, EPA uses the more precise 10.8 units per building.
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multiplied this number by the average number of multifamily housing developments authorized
by building permit, 35,672, to arrive at an estimate of 231,868 acres.
Nonresidential Construction
For nonresidential construction, EPA again used estimates of numbers of permits issued annually
and estimates of average site sizes to calculate the number of acres of land developed annually for
nonresidential purposes. EPA, however, lacked current data on the number of nonresidential C&D
projects authorized annually because the Census Bureau ceased collecting data on the number of permits
issued for such projects in 1995. EPA, therefore, used regression analysis to forecast the number of
nonresidential building permits issued in 1997, based on the historical relationship between residential
and nonresidential construction activity (see Section 4.3.1.2). Using this approach, EPA estimates that a
total of 426,024 nonresidential permits were issued in 1997.
In the original census data (U.S. Bureau of the Census, 2000b), the numbers of permits are broken
down by a variety of project types, including commercial and industrial, institutional, recreational,
nonresidential, and nonbuilding, which includes parks and road and highway projects. EPA allocated the
total nonresidential permits to land use categories based on the proportions of such projects in the 1997
Census. EPA divided project types into commercial and industrial categories because stormwater
management practices for commercial sites generally differ from those for industrial sites. The
commercial category required EPA to combine several census categories. The census categories included
hotels and motels, retail and office projects, and religious, public works, and educational projects, each
with a count of permits.22 EPA combined these categories into a "commercial construction" category
based on engineering judgment that stormwater management practices would be similar across these
project types. When the commercial categories were combined, EPA estimated that 254,566 commercial
permits (59.7 percent of the nonresidential total) were issued in 1997.
22 The commercial category included the following: hotels/motels, amusement, religious, parking garages,
service stations, hospitals, offices, public works, educational, stores, and other nonresidential buildings.
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EPA did not adjust the Census Bureau's industrial category. Census Bureau data indicated that,
on average, 12,140 permits (2.8 percent of the total nonresidential construction category) were issued for
this group. The remaining 159,318 permits (37.4 percent) covered nonbuilding, nonresidential projects
that include parks, bridges, roads, and highways. EPA accounts for the costs of these latter projects when
it reconciles acreage estimates by land use type with the total NRI estimates of land developed annually
(see later in this section).
EPA used two approaches to estimate the average acreage developed by commercial and
industrial construction projects. First, EPA reviewed the project size data collected from the 14-
community study referenced earlier (U.S. EPA, 1999). This study identified 817 commercial sites,
occupying 5,514 acres, and 115 industrial sites, occupying 689 acres. The average site sizes, according to
these data, are 6.75 and 5.99 acres, respectively.
Second, EPA reviewed estimates from CWP (2001) on the average percentage of commercial and
industrial sites taken up by the building footprint. These percentages were 19.1 and 19.6 respectively.
EPA then turned to R.S. Means (2000), which identifies the typical range of building sizes based on a
database of actual projects. Table 4-11 shows the typical size and size range for a variety of building
types in commercial or industrial categories, according to the R.S. Means data. Based on the data shown
in Table 4-11, EPA believes, generally, that there are more small projects than large ones because the
"typical" sizes are smaller than the average of the low and high ranges. As a result, using the data in
Table 4-11, EPA inferred that an assumption of an average building size of 25,000 square feet is
reasonable. This building size, combined with the CWP percentages of footprint to site (which are
slightly more than 19 percent for both commercial and industrial sites), implies an average site size of
approximately 3 acres for both commercial and industrial construction.
EPA again found that the data provided in the 14-community study led to a higher estimate of site
size than a method using the CWP data. To reconcile the estimates obtained from the two approaches,
EPA has taken the midpoint of the estimates. For commercial development, EPA assumed an average site
size of 4.9 acres (the midpoint of 6.75 and 3.0 acres) and for industrial development, EPA assumed an
average site size of 4.5 acres (the midpoint of 5.99 and 3.0 acres).
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Table 4-11. Typical Building Sizes and Size Ranges by Type of Building
Building Category/Type
Typical Size
(Gross Square Feet)
Typical Range
(Gross Square Feet)
Low
High
Commercial - Supermarkets
20,000
12,000
30,000
Commercial - Department Store
90,000
44,000
122,000
Commercial - Low-Rise Office
8,600
4,700
19,000
Commercial - Mid-Rise Office
52,000
31,300
83,100
Commercial - Elementary3
41,000
24,500
55,000
Industrial - Warehouse
25,000
8,000
72,000
a For purposes of this analysis, EPA combines a number of building types, including educational, under the
commercial category.
Source: R.S. Means, 2000.
EPA multiplied the resulting average project sizes by the estimated number of commercial and
industrial permits to obtain an estimate of the total acreage developed for these project categories. For
commercial projects, EPA estimated that 1.2 million acres are developed annually (254,566 permits x 4.9
acres). For industrial projects, EPA estimated that 54,630 acres are developed annually (12,140 permits x
4.5 acres).
Final Allocation of Acres Across All Project Types Using NRI Estimates of Developed Acres
Table 4-12 summarizes the results of EPA's bottom-up approach to estimating the number of
acres of land developed across all categories. The overall estimate of the amount of land developed is
2.01 million acres per year. Residential single-family development accounts for 24.4 percent of the total,
multifamily development for 11.5 percent of the total, commercial for 61.4 percent, and industrial for 2.7
percent.
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Table 4-12. National Estimates of Land Area Developed Per Year, Based on Building Permit
Data
Type of Construction
Permits
Average
Site Size3
(Acres)
Acres Developed
Number
Pet. of
Total
Number
Percent of
Total
Residential
Single-family
1,043,045
77.5%
0.47
490,231
24.4%
Multifamily
35,672
2.7%
6.5
231,868
11.5%
Nonresidential
Commercial15
254,566
18.9%
4.9
1,234,645
61.4%
Industrial
12,140
0.9%
4.5
54,630
2.7%
Total
1,345,423
100.0%
--
2,011,374
100.0%
a For single-family residential construction, this is the average of the average lot size for new construction in
1999 (U.S. Census Bureau, 1999) and the average obtained by EPA (1999). For all other categories, the site
sizes are EPA assumptions based on representative project profiles contained in R.S. Means (2000) and the 14-
community survey conducted in support of the Phase IINPDES stormwater rule (U.S. EPA, 1999). See Tables
4-10 and 4-11.
b A number of project types were grouped together to form the commercial category, including: hotels/motels,
amusement, religious, parking garages, service stations, hospitals, offices, public works, educational, stores, and
other nonresidential buildings.
The estimate of total acreage developed, 2.01 million acres (shown in Table 4-12), can be
compared with the estimate provided by NRI. NRI estimates that a total of 2.24 million acres are
converted from undeveloped to developed status each year. As noted above, some acreage would not be
covered by the options analyzed in this EA because of site size or other waivers. The estimated acreage
subject to Option 1 (the widest scope option analyzed), based on NRI data, is 2.18 million acres (see
Section 4.3.1.2.1).23
EPA considers the estimate of 2.01 million acres, derived on the basis of the site size calculations
that are summarized in Table 4-12, to be close to the 2.18 million acre estimate derived from NRI data.
Areas not accounted for in EPA's estimates include those converted as a result of road, highway, bridge,
park, monument, and other nonbuilding construction projects.24 EPA generally assumes that the
23 This is the acreage covered under Option 1, which affects sites of 1 acre or more in size. Estimates of
the acreage covered under Options 2 and 4, which affect sites of 5 acres or more, are made in Section 4.3.1.2.4.
24 As noted above, EPA estimates there are approximately 159,000 such projects permitted each year.
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difference between EPA's estimate and the NRI estimate can be accounted for by acres of nonbuilding
construction. For the purpose of developing national compliance costs that include costs for nonbuilding
construction, EPA has allocated the entire NRI acreage according to the distribution shown in the final
column of Table 4-13.25
Table 4-13. National Estimates of Land Area Developed Based on NRI Totals
Type of Construction
Acres Based on Permits
Data
Allocated NRI Acreage,b
Technical Development
Document0
Acreage Developed on
Sites of more than 1 acre,
Option 1
Number1
Pet. of
Total
Residential
Single-family
490,231
24.4%
540,800
533,781
Multifamily
231,868
11.5%
253,358
250,937
Nonresidential
Commercial"1
1,234,645
61.4%
1,366,387
1,332,622
Industrial
54,630
2.7%
59,009
57,379
Total
2,011,374
100.0%
2,219,553
2,174,719
aFrom Table 4-12.
b This column distributes the total acreage (estimated by NRI) to be converted on an annual basis (adjusted for waivers),
according to the distribution by type of development estimated through analysis of permits data.
c U.S. EPA, 2004, Section 4.2.2.2, Table 4-8.
d A number of project types were grouped together to form the commercial category, including: hotels/motels, amusement,
religious, parking garages, service stations, hospitals, offices, public works, educational, stores, and other nonresidential
buildings.
At each progressively more detailed level of analysis, EPA engineers adjusted the number of sites
so that no fractional sites would be considered. Thus, if EPA allocated 537.7 sites to a state, the number
of sites was rounded to 538 and acreage was adjusted accordingly. EPA's cost analysis included a
number of disaggregations by site size, land use category, state, ecoregion, and hydrologic units. EPA
also rounded numbers of units at each step. Thus, the total acreage differs slightly when different
breakouts are presented. Table 4-13 presents the total acreage estimates that are presented in the
Technical Development Document (U.S. EPA, 2004). In all cases, the acreage estimates shown in the
25 This distribution implies that the acres not accounted for by NRI (see Table 4-13) will be costed at the
weighted average cost across the single-family residential, multifamily residential, commercial, and industrial
categories. EPA generally recognizes that this approach implies an assumption that incremental costs for
nonbuilding construction are similar to incremental costs for building construction.
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Technical Development Document are slightly higher than those estimated on the basis ofNRI data. See
the Technical Development Document, Section 4.2.2.3 for more details.
4.3.1.2.3 Step Three—Distributing Acreage by Project Size
The third step in estimating the national compliance costs is to allocate the number of acres in
each of the four land use categories according to project size. The starting point for this step is the 14-
community study (U.S. EPA, 1999), which collected project type and size data. Table 4-14 shows the
distribution by project size for each land use category. (The information corresponding to site sizes of
less than 1 acre has been omitted). Using this information, EPA calculated the total number of acres by
project type and by project size.
4.3.1.2.4 Step Four—Adjusting the Numbers of Acres Downward to Account for the
Regulatory Scope of Options 2 and 4.
EPA made further adjustments to the acreage by type and size to account for the differences
between the scopes of Option 1 and Options 2 and 4. The distributions of acreage by project type
presented in Table 4-14 account for all sites greater than 1 acre. The acreage distributions accounted for
at this point, therefore, only apply under Option 1, which covers sites of 1 acre or larger. EPA estimated
the numbers of acres that would be excluded under the site size limitations of Options 2 and 4, which
cover sites of 5 acres or more.
EPA calculated the numbers of acres excluded by project type under Options 2 and 4 by
estimating the acreage in sites more than 1 acre and less than 5 acres in size. The 3-acre size class
represents projects on sites greater than 1 acre and less than 5 acres. The acreage associated with this size
class category was subtracted from the matrix of acreage by region, type, and size class. EPA examined,
for example, the 14-community study (U.S. EPA, 1999) and found that 6.1 percent of acreage developed
for single-family housing was assigned to sites in the 3-acre size class (see Table 4-14). Thus 6.1 percent
of the acreage associated with single-family construction is not considered to be covered under Options 2
or 4. EPA made similar estimates of the acreage converted to multifamily, commercial, and industrial
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Table 4-14. Distribution of Permits by Site Size
Site Size (Acres)
No. of Permits
Acres by Size
Percent Acres Occupied
by Size
Single-Family Residential
3
228
684
6.1%
7.5
138
1,035
9.2%
25
175
4,375
39.1%
70
30
2,100
18.8%
200
15
3,000
26.8%
Total
586
11,194
100.0%
Multifamily Residential
3
100
300
8.7%
7.5
61
458
13.3%
25
71
1,775
51.7%
70
10
700
20.4%
200
1
200
5.8%
Total
243
3,433
100.0%
Commercial
3
356
1,068
20.4%
7.5
86
645
12.3%
25
91
2,275
43.4%
70
16
1,260
24.0%
200
0
0
0.0%
Total
549
5,248
100.0%
Industrial
3
55
165
25.4%
7.5
10
75
11.5%
25
8
200
30.8%
70
3
210
32.3%
200
0
0
0.0%
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Table 4-14. Distribution of Permits by Site Size
Site Size (Acres)
No. of Permits
Acres by Size
Percent Acres Occupied
by Size
Total
76
650
100.0%
Total
3
739
2,217
10.8%
7.5
295
2,213
10.8%
25
345
8,625
42.0%
70
59
4,270
20.8%
200
16
3,200
15.6%
Total
1,454
20,525
100.0%
Based on permitting data from the following municipalities or counties: Austin, TX; Baltimore County, MD; Cary, NC; Ft.
Collins, CO; Lacey, WA; Loudoun County, VA; New Britain, CT; Olympia, WA; Prince George's County, MD; Raleigh,
NC; South Bend, IN; Tallahassee, FL; Tuscon, AZ; and Waukesha, WI (U.S. EPA, 1999).
Source: EPA estimates.
uses that would be excluded under Options 2 and 4. Table 4-15 compares the distribution of acreage
by land use type covered under Option 1 with the acreage covered under Options 2 or 4. The table also
presents the distribution of CGP-affected acreage by land use type under Options 2 or 4. This affected
acreage, under the CGP component of Option 2 and under Option 4, is approximately two-thirds
of the total developed acreage. To simplify the calculation for total compliance costs, EPA multiplies
costs per acre developed by the number of acres developed. Multiplying costs per affected acre by the
number of affected acres would yield the same result.
The reason that CGP-affected acreage is so much smaller than the total acreage estimated to be
developed annually is that many states already enforce ESC provisions as stringent or more stringent than
the current CGP. Codifying the provisions of the CGP, under the CGP component of Option 2 and under
Option 4, will have no effect on costs in these states. See Section 4.1.2 for a discussion of how state
equivalency was determined. The Technical Development Document (U.S. EPA, 2004) provides
additional information on the acreage estimates for each state.
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Table 4-15. Estimates of Acreage Affected Under Final Action Options 2 and 4
Type of Construction
Acreage Affected
Under Option la
Percent Excluded
Under Options 2
and 4b'c
Acreage
Developed
Subject to
Options 2
and 4C
Acreage
Affected Under
CGP
Component of
Option 2 and
Option 4C
Residential
Single-family
533,781
6.1%
500,985
324,158
Multifamily
250,937
8.9%
228,713
147,810
Nonresidential
Commercial"1
1,332,622
20.4%
1,061,245
686,563
Industrial
57,379
25.8%
42,583
27,545
Total
2,174,719
--
1,833,526
1,186,076
a From Table 4-13.
b Based on analysis of site size distributions found in EPA (1999). Due to rounding to whole acres at various parts of
the engineering cost analysis, there are slight differences in the percentage of acreage excluded for multifamily and
industrial construction; see Table 4-14.
c U.S. EPA, 2004.
d A number of project types were grouped together to form the commercial category, including: hotels/motels,
amusement, religious, parking garages, service stations, hospitals, offices, public works, educational, stores, and other
nonresidential buildings.
Source: EPA estimates.
4.3.1.3 Estimating Total National Costs
To calculate the total national costs of compliance to industry, EPA's last step was to multiply the
number of acres by adjusted costs per acre for each of the four land use categories and the size categories
covered by each option (e.g., the 3-, 7.5-, 25-, 70-, and 200-acre site sizes under Option 1 and the 7.5-,
25-, 70-, and 200-acres site sizes under Options 2 and 4). Costs for each size and type were added,
producing a total compliance cost for each option. Costs are also presented by size and by land use type
for each option in Chapter Five, Section 5.1. The spreadsheet that calculates all of these costs is presented
in the Rulemaking Record (DCN 45020).
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4.3.2 Methodologies for Measuring Impacts on Markets
EPA uses three complementary approaches to estimate the market impacts of the Final Action.
These approaches are used to evaluate somewhat different measures of impact and are not necessarily
consistent with each other, the C&D/FrMS analysis, or the C&D/PrMS analysis. Two of the analyses treat
the nation as a single market; the third treats each city as a distinct market for C&D products. These three
market models comprise the Consumer Impact Model, the National Housing Market Model, and the
Regional Market Model. Detailed mathematical equations and data supporting the construction of these
models can be found in the EA of the proposed rule (U.S. EPA, 2002a). Summaries of the results can be
found in the current EA (Chapter Five, Section 5.6), while detailed results are presented in the
Rulemaking Record (DCN 45024).
The first approach, embodied in EPA's Consumer Impact Model, assumes all of the costs of
compliance with the regulation are passed through to the home buyer. When a home is more costly,
fewer households are able to qualify for a mortgage to purchase it. This change in market size is an
indicator of the impact of the final action (see Section 4.3.2.1).
In the second approach, EPA uses a linear partial equilibrium market model (the National
Housing Market Model module of EPA's C&D/PEqMMS), in which the costs of compliance shift the
national single-family housing supply curve. A portion of the increased costs raises the price of new
housing, while the balance is absorbed by the builder (see Section 4.3.2.2).
The third approach (the Regional Market Modeling Module of the C&D/PEqMMS) also uses
linear partial equilibrium models, and EPA developed four such models for the single-family,
multifamily, commercial, and industrial sectors. For the residential construction sectors (single-family and
multifamily), the Regional Market Modeling Module analyzes 215 metropolitan statistical areas (MSAs),
based on local measures of residential construction activity, to determine changes in prices and quantities.
For the single-family housing market, this model also measures changes in affordability in terms of a
rough Housing Opportunity Index (HOI). HOI is a well publicized measure of housing availability. For
the commercial and industrial construction markets, the model predicts changes in price and quantity
based on the analysis of 52 and 35 MSAs, respectively, due to the more limited data available for these
sectors (see Section 4.3.2.3).
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Each of the three approaches offers a different perspective on the impact of the action on the
various markets for C&D products. The outputs of the National Housing Model and the Regional Market
Modeling modules are also used to determine the net economic impacts on the U.S. economy. See
Section 4.3.3 for a discussion of the Net Economic Impact Model (the final module of the
C&D/PEqMMS) and its use of the various market model outputs to determine economic output and
employment effects in the U.S. economy.
4.3.2.1 Methodology for Measuring Impact on Consumers (Single-Family Housing)
EPA's Consumer Impact Model uses the total price multiplier from the previously described
C&D/PrMS. As discussed in Section 4.2.1, cost increases at a residential housing project can translate
into an increase in the asking price of a new home by more than the original cost increase, due to the
builders' interest and opportunity costs and a fixed percentage expectation for profit and overhead that
drive an asking price increase under a 100 percent cost passthrough scenario. These simple assumptions
about expected proportionate profit margins, borrowing, and contingencies (discussed in Section 4.1.2)
indicate that added incremental compliance costs are multiplied by a factor of 1.5 to 2.1 in the final
consumer price. The existence of these multipliers is supported by census data and the housing economics
literature. Luger and Temkin (2000), for example, report a compliance cost multiplier of 2 to 6 times
actual compliance costs. The higher multiplier range reported by Luger and Temkin (2000) could reflect
a tight housing market in high growth regions.
In using a cost multiplier in the Consumer Impact Model, EPA is assuming that the entire costs of
compliance are borne by consumers (unlike later sections, in which at least a portion of the costs are
assumed to be borne by the C&D industry). This assumption reflects Landis' (1986) and Luger and
Temkin's (2000) surveys that suggest all of the additional costs of compliance with new stormwater
regulations would be passed through to new home buyers in the form of higher prices for a unit of a given
quality. This assumptions implies that the quantity of new housing built would not change because
demand is driven by demographics more than marginal price considerations (i.e., demand is inelastic),
and competition in supply is limited because of oligopolistic markets in many areas and infinitely elastic
supply in others. This portion of the analysis is motivated by the observation that an increase in the price
of a home increases the income necessary to qualify for a home mortgage to purchase the home and,
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therefore, reduces the number of households able to afford it. One measure of the impact of the
regulation is the change in the size of the market (i.e., the number of households that can afford the new
home). This is the basis of EPA's Consumer Impact Model.
The Consumer Impact Model uses the median house price from the baseline model project for a
7.5-acre single-family development as the baseline price.26 First, the monthly principal, interest, taxes,
and insurance (PITI) payment for the new home is calculated, using the baseline price as a starting point.
In 2000, buyers financed an average of 77.4 percent of the home purchase price at an interest rate of 7.52
percent (FHFB, 2001). EPA assumes a 30-year conventional fixed rate mortgage for ease of calculation.
EPA also assumes a monthly real estate tax rate of $1 per $1,000 of home value and an insurance
payment of $0.25 per $1,000 of home value (Savage, 1999). These assumptions are applied to the home
price calculated for the baseline to derive an estimate of the monthly PITI payment required to purchase a
new home. This monthly payment is then recalculated for each of the regulatory options, based on the
new price derived by multiplying compliance costs per acre by the total price multiplier and adding the
resulting value to the baseline price.
EPA then estimates the difference in the income level necessary for a homebuyer to qualify to
purchase a house of the price estimated under each of the options. Subsequently, EPA estimates the
number of households that no longer qualify for a mortgage of the size assumed necessary to cover the
new price, using the standard lending practices discussed earlier. This analysis is based on Census
Bureau statistics of household income, from which EPA calculated the number of households represented
at the income qualifying level in the baseline and under each option. EPA calculates the number of
households that no longer qualify for a mortgage at the higher option prices by noting the number of
households at the baseline required income level and each option's required income level and then
computing the difference in the number of households. This result is conservative because consumers
have alternatives, such as selecting lower quality features or forgoing other expenditures, to increase their
down payment, thus lowering the amount borrowed. More detailed discussion of the methodology is
provided in the EA for the proposed rule (U.S. EPA, 2002a). EPA received no comments directly
affecting this methodology.
260ther project sizes' baseline prices vary from this price by less than $2,000.
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Table 4-16 illustrates the calculations performed in the Consumer Impact Model using
hypothetical option costs. These costs are only included as examples. EPA uses the costs of the actual
regulatory options in Chapter Five to estimate the number of households priced out of the new housing
market as a result of each regulatory option.
Table 4-16. Change in Housing Affordability—Sample Calculation
Data Element
Baseline
Hypothetical Option
Average per lot cost difference from baseline
$0
$llla
Difference in cost per lot X multiplier
$0
$23 8a
Home price
$316,099
$316,337
Monthly Morteaee Pavment Calculation:
Principal and interest (30-year fixed at 7.52%; 77.4 loan-
to-value)
$1,714
$1,715
Real estate taxes
$316
$316
Homeowner's insurance
$79
$79
Total principal, interest, taxes, and insurance
$2,109
$2,111
Income Criterion:
Income necessary to qualify for mortgage
$90,393
$90,461
Change in income necessary
$0
$68
Number of households shifted (thousands)
0
-24
Percent change in number of qualified households
0.0%
-0.15%
a Hypothetical cost difference. Estimated actual costs are used in Chapter Five.
Source: EPA estimates.
4.3.2.2 Methodology for Measuring Impact on the National Housing Market
Another approach to evaluating the impact of the Final Action on housing markets is to use the
market based approach underlying EPA's National Housing Model Module of the C&D/PEqMMS. This
and other partial equilibrium market models use data on elasticities of market supply and demand to
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predict the changes to price and quantity that will occur given a producer cost increase of a particular
magnitude. The economic theory that supports this approach and the detailed equations used to calculate
the market impacts are documented in the EA to the proposal (U.S. EPA, 2002a). EPA received no
comments on the approach or data used to construct the National Housing Model module of the
C&D/PEqMMS.
EPA's first step in constructing the National Housing Model was to identify the appropriate data
to specify the elasticities of supply and demand in this market. Empirical studies find a highly elastic
supply and a somewhat inelastic demand for new housing (DiPasquale, 1999). To indicate highly elastic
supply, EPA assumes a price elasticity of supply of 4.0. DiPasquale (1999) cites studies with estimates
for new housing supply elasticity from 0.5 to infinity, but the majority of the long run estimates are in the
3 to 13 range. Housing demand elasticity is equally controversial. EPA assumes a price elasticity of
demand of -0.7 to indicate a somewhat inelastic demand function. Using the supply and demand
elasticities (which are representative of the literature: Es= 4 and Ed=-0.7), EPA calculates that some of the
costs of compliance in the partial equilibrium model might be absorbed by the builder, unlike the
complete cost passthrough assumption used in the Consumer Impact Model. The proportions flowing to
consumers and builders depend on the relative elasticities of supply and demand, which in this case,
indicate that the cost passthrough is 85 percent. In this model, therefore, the industry absorbs 15 percent
of the costs of compliance and passes the remainder on to homebuyers as a price increase. Sensitivity
tests of these assumptions are shown in Appendix 5B of the proposal EA (U.S. EPA, 2002a). Since the
magnitudes of compliance costs per house in the Final Action are similar to those estimated at proposal,
the results of the sensitivity analyses are still valid. These results indicate that moderate changes in
elasticity assumptions do not appreciably alter the results.
EPA then made assumptions about the shape of the curves associated with the elasticities in the
published literature. The assumption that compliance costs of new environmental regulations result in
only small marginal changes in prices and quantities provides the basis for EPA's modeling of the market
using supply and demand curves that are assumed to be linear in the relevant range. This type of simple
linear partial equilibrium market model is similar to those used in other recent EPA regulations (U.S.
EPA, 2001). See the EA for the proposal (U.S. EPA, 2002a) for additional supporting information.
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EPA then established the baseline conditions of the national housing market. National statistics of
residential housing starts from the Census of Construction are used as the baseline quantity for the model.
The baseline price is the median new home price (based on the 7.5-acre project from the C&D/PrMS
described in Section 4.2.1). This combination of quantity and price provides the basis for EPA to
describe the baseline market equilibrium, where supply equals demand.
Given this baseline equilibrium point, the elasticities estimated, and EPA's assumptions about
curve shape, EPA identified a linear supply curve and linear demand curve. The increased costs of
compliance under each option raise builders' costs and shift the supply curve upward to the left. The
change in prices and quantities depends on the relative slopes of the supply and demand curves.27 The
new intercept is calculated using the per unit costs of complying with the Final Action. Equilibrium
prices and quantities are then recalculated, using the new post-compliance price and intercept, to estimate
the changes in price and quantity associated with each option. Detailed results are provided in the
Rulemaking Record (DCN 45026). Results are summarized in Chapter Five, Section 5.6.
The model also outputs welfare effects, which are discussed in more detail in Section 4.3.3,
which discusses the methodology for determining net economic impacts.
4.3.2.3 Methodology for Measuring Regional Market Impacts
The approaches described in the previous sections treat housing as a single, national market with
the same demand elasticities applying across the country. In reality, however, market conditions can vary
widely among regions, states, and cities. Markets vary both in the level of activity and the structure of the
industry. It would, undoubtedly, be easier to pass through compliance costs to consumers in a hot
housing market than in a depressed market. EPA's third modeling approach, embodied in the Regional
Market Model module of the C&D/PEqMMS, captures such regional variation by setting up a partial
equilibrium model for housing markets for each MSA, using statistics of the level of activity in the MSA
27EPA chose to model the increased costs as a slope-preserving change in the supply curve intercept rather
than an elasticity-preserving change in slope. A change in the cost to the producer is assumed to raise the supply
curve parallel to the baseline curve. If the elasticity were preserved, the slope of the supply curve would change,
leading to one part of the curve appearing to shift more than another part of the curve.
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to select the parameters of the model. Using this approach, EPA is also able to perform a consumer
affordability analysis at the regional level, similar to the analysis discussed in Section 4.3.2.1 for the
national level.
At proposal, the partial equilibrium models used a weighted average of ecoregion costs per acre,
based on populations in each ecoregion within the state. For the Final Action, EPA conducted a more
extensive analysis of the equivalency of state regulations to provisions of the options. From this analysis,
costs were calculated for each state, based on the specific BMPs that would have been required under
state law and the new ones that would be required by each option. Thus, each state could have different
average costs per acre. This difference is particularly notable for Options 2 and 4, in which some states
have relatively low costs per acre and other states, where EPA deemed the state did not have requirements
equivalent to option requirements, have higher costs per acre. EPA used these individualized state costs in
the partial equilibrium modeling of state-by-state impacts.
EPA was not able to locate data sufficient to conduct a national market analysis of the
multifamily, commercial, and industrial sectors. EPA found no studies analogous to Montgomery (1996)
for modeling the commercial or industrial construction sectors as single, national markets. The Agency,
therefore, conducted a regional-level analysis of these sectors, using the Regional Market Model Module
and state-specific per-acre costs. The following subsections discuss the regional-level model for the
single-family housing sector (Section 4.3.2.3.1) and explain how this model was adapted to create models
to analyze the other three sectors (Section 4.3.2.3.2).
4.3.2.3.1 Single-Family Housing
The Census Bureau collects information about housing starts and the size of the existing housing
stock at the MSA level. EPA infers that the new housing market is active in areas where a large
proportion of the total current housing stock comprises housing built during the 1990s. EPA expects that
demand is less elastic in these areas than in areas with slower growth. As discussed in Section 4.3.2.2, the
long-run supply of new housing is, overall, assumed to be quite elastic. These facts provide the basis for
selecting elasticities to represent housing markets at the MSA level.
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EPA developed separate partial equilibrium models for each MSA. Similarly to EPA's
development of the National Housing Model described earlier, EPA used building permit data from the
Census Bureau and median new home price data from the C&D/PrMS to establish the baseline
equilibrium point for each MSA. Demand elasticities were selected based on the ratio of new housing
units authorized, calculated for each year during the period 1990 to 1996, to total 1997 housing stock
(U.S. Census Bureau, 1998). EPA mapped regions where this ratio is very low to the most elastic
estimates of demand found in the literature and those regions where the ratio is very high to the least
elastic demand elasticity estimates. EPA believes this approach captures the relative differences in
demand elasticity between active and depressed housing markets around the country (see DCN 45027 for
EPA's mapping results).
Each MSA model is shocked with the average estimated compliance costs for a new home in the
state, as in the National Housing Model. EPA then uses each MSA model to estimate changes in prices,
quantities, and welfare measures. As there are more than 200 MSAs, it is not practical to report all of the
individual results. Instead, all of the MSAs in a census division are averaged together to give a sense of
the effect of compliance costs on each region of the nation. Chapter Five, Section 5.6 reports the results
of this analysis on a state-by-state basis. The spreadsheets used to create these outputs appear in the
Rulemaking Record (DCN 45026).
Affordability is a significant concern for some stakeholders, so another analysis performed using
the MSA models investigates changes in housing affordability in major U.S. regions. NAHB publishes
the HOI for 180 MSAs. The HOI measures the proportion of the housing stock a family with the median
income in the MSA can afford. NAHB compares the median family income to the actual distribution of
homes by price in the MSA. EPA uses a similar, but simplified approach to measure affordability by
MSA.
The Agency considered the cost of acquiring and managing the more detailed HOI information
disproportionate to an improvement in the accuracy of the results. EPA, therefore, assumed home prices
are normally distributed about the median price to create an analysis termed "rough" HOI (RHOI) Thus,
RHOI is the cumulative probability of homes with prices less than the maximum PITI that a household
with the median income can afford. For MSAs with HOIs reported by NAHB, EPA adjusts the variance
of the normal curve so that RHOI yields the NAHB baseline HOI index (NAHBHOI). In those MSAs
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where NAHB does not calculate HOI, unadjusted RHOI is reported.28 To assess the impact of the
regulatory options, the adjusted RHOI is calculated with the new sales price from the market model. The
percent change in adjusted RHOI is an indicator of the added stress on the housing market associated with
compliance costs.
A baseline RHOI of 41.6, for example, indicates that a median income family can afford 41.6
percent of the homes on the market in an MSA. If compliance costs raise the price of homes and the
RHOI falls to 41.5, then 0.24 percent of the homes the family could have bought, absent the regulation,
are now out of reach ([0.416 - 0.415J/0.416 = 0.0024).
Both the Consumer Impact Model and the RHOI component of the C&D/PEqMMS show how
changes in costs affect home buyers. The RHOI approach, however, has the advantage of recognizing
local market differences and applying them within the model. Average RHOI among MSAs in census
divisions before and after compliance costs are applied are reported in Chapter Five, Section 5.6. The
changes in RHOI can also be used to calculate the number of households priced out of the housing
market, using the same assumptions about how to compute levels of required income, given a particular
house price used in the Consumer Impact Model. Chapter Five, Section 5.6, also reports the results of this
analysis. Also, see DCN 45027 in the Rulemaking Record for more information.
EPA received comments on its use of the RHOI to compute housing affordability changes.
NAHB asked EPA to distinguish the Agency's HOI approach, which is an approximation, from more
precise HOI analyses. NAHB also stated it would provide information for EPA to calculate a more
precise HOI, but did not include that information in their comments. EPA has distinguished the Agency's
method by labeling it "rough" HOI, or RHOI. EPA believes that the use of RHOI does not bias the
impact estimates in any consistent direction.
28 In 13 MSAs, the distribution of home prices is so different from normal that RHOI cannot approximate
NAHBHOI with the variance adjustment. These MSAs were deleted from the results.
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4.3.2.3.2
Multifamily and Nonresidential Construction
As another part of the Regional Market Modeling Module, EPA developed three market models
of the multifamily and nonresidential (commercial and industrial) construction industries. All three are
similar to the residential regional partial equilibrium model for single-family housing discussed earlier.
They treat each state as a separate market using adjusted demand elasticities. Each model produces
estimates of changes in prices, quantities, and welfare measures.
All three models require information on baseline equilibrium price and quantity, where quantity
is estimated on the basis of permit information (as EPA did for single-family housing). Numbers of
permits for multifamily housing were derived as discussed in Section 4.3.1. As noted earlier in Section
4.3.1, however, the Census Bureau discontinued collection of nonresidential building permit information
in 1994. To estimate nonresidential building permits issued in later years, EPA regressed nonresidential
building permits on residential building permits. This regression was undertaken in the calculation of
national-level costs (see Section 4.3.1). The relationship among these variables differs from state to state.
Regressions therefore, were estimated at the state level. For more information, see ERG (2001a) in the
Rulemaking Record.
EPA allocated the nonresidential building permits estimated for each state to commercial,
industrial, and other projects, based on the number of permits issued for each type of project in the 1994
building permit data. The number of permits was estimated in Section 4.3.1. For more information, see
ERG (2001a) in the Rulemaking Record.
The multifamily and nonresidential models apply equations from the EA of the proposed rule to
estimate supply and demand curves (U.S. EPA, 2002a). Compliance costs are converted to the same units
as the rental rates. The increase in costs shifts the supply curve to the left and upward. Market results are
reported in terms of changes in rents and building permits and changes in consumer and producer surplus.
Market results can be converted to changes in indirect employment using an appropriate input-output
multiplier (see Section 4.3.3).
The following sections describe the assumptions for the multifamily and nonresidential
construction sector models that differ from those used for the single-family sector model.
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Multifamily Housing
Within the Regional Market Modeling Module for multifamily housing, EPA developed separate
partial equilibrium models (as it did for single-family housing) with demand elasticities for each of the
215 MSAs used to characterize the single-family component of the module. The activity measure was the
proportion of housing stock built during the 1990 to 1996 time period, with multifamily building permits
as the basis for determining baseline quantities (see Section 4.3.1). Separate price series or rental rates for
multifamily housing are not reported, so EPA used single-family housing prices as a near substitute. EPA
converted the compliance costs, including multipliers, to the same units as the rental rates. The increase
in costs shifts the supply curve to the left and upward (see the EA of the proposed rule for equations and
detailed discussions [U.S. EPA, 2002a]). The results are reported in terms of changes in rents, building
permits, consumer surplus, and producer surplus. These results become inputs to calculations used to
estimate changes in net economic impacts (see Section 4.3.3). Results are summarized in Chapter Five,
Section 5.6. Spreadsheets calculating these changes can be found in the Rulemaking Record (DCN
45027).
Commercial Construction
The commercial market is highly disaggregated into regional markets. Office rents for similar
buildings (Class A space) range from $17 per square foot per year in Wichita to more than $60 per square
foot per year in San Francisco (Grubb & Ellis, 2001). This disparity shows that arbitrage among markets
is not possible and space in each area should be considered a different commodity. Many real estate
companies maintain data on conditions in regional markets. Typically, activity in the market is measured
in terms of the vacancy rate and asking rents. EPA developed a market model for office space similar to
the regional partial equilibrium models developed for residential construction to indicate the effects on
commercial construction.
In the partial equilibrium model, the quantity of construction in each category is measured by the
number of building permits issued. Rental rates, in dollars per square foot per year, are closely watched
indicators of demand for commercial space and serve as our price. Rents and activity reports for 35 retail
space markets around the country, from a recent real estate marketing firm report (Grubb & Ellis, 2001),
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provide the baseline information for the market model. As EPA used the ratio of new building permits to
housing stock in the residential model, EPA used the activity reports to create a scale of demand intensity
in the commercial model. The activity reports provided only descriptive assessments of market activity.
EPA rated the level of activity described on a scale of 1 to 5. EPA then used this scale to map an
appropriate demand elasticity, from a range of possible market elasticities, to each market. See ERG
(2001b) in the Rulemaking Record for more information on this process.
The number of nonresidential building permits was projected at the state level, while the Grubb &
Ellis commercial data are from 35 selected cities. Building permit data are insufficient to model each
city. Thus, EPA models each state as a separate market, using the average rent and activity rate for the
cities within the state to represent the state market. This approach is reasonable where state office and
retail markets are concentrated in one city or one city is representative of general, statewide market
conditions. The approach is less defensible in large states with many population centers because market
conditions can vary from city to city within such states. Nearly half of the states were not represented by
cities in the Grubb & Ellis data. For these states, the average rent and activity values for cities within the
census division containing the state were used to indicate state market conditions.
Demand for office and retail space is relatively insensitive to small changes in price. Since
nonresidential construction activity tends to be driven by interest rates, job growth, and location-specific
factors rather than building costs, cost passthrough is very high. Huffman (1988), for example, found that
impact fees were largely passed on to end users in the long run. EPA, therefore, applies a range of
elasticities, from -0.01 to -0.80, to represent relatively inelastic demand for commercial space. In regions
with many vacancies, lessees can be more sensitive to price, so a more elastic demand curve is used. In
regions with tight markets, lessees have fewer options and, generally, have little choice but to pay the
asking price, so demand is less elastic. Builders can pass on a higher proportion of their costs in tight
markets than in soft markets. Even in the softest market, however, 83 percent of costs are passed through
to consumers under these assumptions.
Similarly to the National Housing Model, this model outputs the changes in price and quantity
expected given the baseline price conditions for commercial properties from the C&D/PrMS, the cost
increases adjusted by the total cost multiplier, and the elasticities assumed for the MSAs modeled. It also
outputs changes in welfare resulting from the cost increases associated with the various regulatory
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options. Chapter Five, Section 5.6 summarizes these results, which can also found in the Rulemaking
Record (DCN 45025).
Industrial Construction
The industrial space market model is similar to the commercial model. It uses the rental rate for
warehouse space as the baseline price, and the vacancy rate for industrial space serves as an indicator of
market activity. Industrial space users are considerably more mobile and price sensitive than commercial
or residential space consumers, so demand for industrial space is more elastic. The range used in this
analysis is -0.2 to -1.5. The outputs discussed for the commercial space model are also generated by the
Regional Market Modeling Module for industrial space. See Chapter Five, Section 5.6 for a summary of
the results and DCN 45038 in the Rulemaking Record for more detailed information.
4.3.3 Methodology for Modeling Net Economic Impacts
The last module of the C&D/PEqMMS is the Net Economic Impact Model. This model
embodies EPA's analysis of net economic impacts on output (industry revenues and GDP) and
employment. The discussion of the analyses undertaken through this model is divided into four sections.
Section 4.3.3.1 presents EPA's methodology for estimating the net economic impacts on the U.S.
economy in terms of changes in employment (measured as full-time equivalents)29 and output (measured
as revenues within the industry and as GDP in the U.S. economy as a whole). Section 4.3.3.2 presents the
calculation of consumer and producer surplus losses and deadweight losses to the economy. Deadweight
losses are losses that are not compensated for by gains elsewhere in the economy. Section 4.3.3.3
investigates the potential for any important regional or community-level impacts. Finally, Section 4.3.3.4
presents EPA's reason for assuming that international trade effects are minimal.
291 FTE = 2,080 hours.
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4.3.3.1 Calculation of Output and Employment Effects in the U.S. Economy
EPA conducted an output and employment analysis to account for the fact that changing the costs
of production in one industry has a direct effect on that industry's output and a proportionate impact on
employment. This change also has a ripple effect in all other sectors of the economy (contributing to
changes in output and employment in these other sectors). These additional, ripple effects are considered
indirect effects (e.g., when they affect suppliers to the regulated industry) or induced effects (i.e., when
they affect the economy through changes in consumer spending induced by the direct and indirect
effects). Induced effects, for example, occur when reductions in the labor force induce a decline in overall
consumer spending. The direct effects on output can be measured using market models. Indirect and
induced effects on output and direct, indirect, and induced effects on employment can be measured using
input-output analysis.
To compute total output and employment effects on the U.S. economy, EPA used established
input-output multipliers developed by the U.S. Department of Commerce's Bureau of Economic Analysis
(BEA). Multipliers generated by BEA's Regional Input Output Modeling System (RIMS II) provide a
means of estimating the full scope of output and employment changes within the U.S. economy, given a
direct change in the output of one or more industries. These multipliers are termed the final demand
multipliers for output and employment. EPA also uses a direct effect multiplier for employment, which
allow it to calculate the employment effect within the C&D industry groups, given the direct output effect
in those groups. EPA only uses the national-level multipliers for the construction industry, because they
are the best indicators of economy-wide effects.
It is important to note that the changes in output and employment are not unidirectional. Losses
in output and employment will occur in the C&D industry, but environmental regulations generally
induce increased output from firms that make or install environmental controls or provide other services
related to regulatory compliance. The output and jobs created by new spending in the environmental
industry offsets, to some extent, the loss of output in the affected industry. In the case of the C&D
industry, the same firms that now do much of the site preparation work would also be charged with
implementing ESCs and, most likely, conducting ESC certification and inspection. Contractors would be
hired to build sedimentation ponds, improve grades, and construct any incremental ESCs triggered by the
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Final Action. While the regulation is costly in one sense, much of that cost flows directly back into the
industry, stimulating more activity, output, and employment.
EPA calculates the direct output effects of the options using the results of the two
C&D/PEqMMS modules discussed in Section 4.3.2. EPA uses the results of the National Housing Model
to estimate the change in revenues expected for the single-family housing sector as a result of the options
considered, and the Agency uses the results of the regional models for the commercial, industrial, and
multifamily sectors to estimate the change in revenues expected for these sectors. The outputs of these
models provide EPA with a new price and quantity for each of the four industry sectors. Multiplying the
new price by the new quantity provides the post-regulatory revenues, which can be compared to the
baseline revenues (baseline price multiplied by baseline quantity) to calculate the change (decline) in
revenues associated with the increase in compliance costs.
EPA then applies the final demand output multiplier for the construction industry to the revenue
changes calculated for each industry sector to obtain the full estimate of the total output effects on the
U.S. economy. EPA uses the direct effect employment multiplier to calculate the employment changes
within the industry, then uses the final demand employment multiplier to estimate the broader
employment changes throughout the economy.
These calculations address the declines in output and employment in the economy that are
estimated to occur as a result of incremental compliance costs. As noted earlier, however, there are also
economic gains to the economy, as construction firms and others take on the additional work to install
and maintain ESCs and/or inspect and certify sites. These gains are measured in terms of the total
national compliance costs. These costs become the direct (and positive) revenue effects on the C&D
industry. EPA uses the same approach to calculate total output and employment effects resulting from this
direct gain of revenues. The Agency uses final demand output multipliers and direct effect and final
demand employment multipliers to calculate the gains in output and employment associated with the
implementation of the options considered. Chapter Five, Section 5.7, presents the output and employment
effects calculated for each of the options considered for the Final Action. Additional supporting materials
and spreadsheets are located in the Rulemaking Record (DCNs 45024 and 45026).
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4.3.3.2 Calculation of Welfare Effects
The regulatory options considered for the Final Action also have a number of implications for the
welfare of society. Welfare losses occur when the supply curve shifts, following introduction of
incremental compliance costs. These losses can be measured as losses of consumer surplus, losses of
producer surplus, and deadweight losses.
Consumers gain utility from products when the market price is lower than the value they derive
from the product. This difference between market price and value to the consumer is termed "consumer
surplus." Producers also gain a surplus, or profit, when they can sell a product for more than the cost of
production. The incremental C&D options will shift the supply curve of producers upward and to the left.
As a result, consumers lose some of their surplus. The means by which the consumer surplus is lost is
irrelevant from a welfare economics perspective. Consumers might choose cheaper options, such as
lower quality carpets or cabinets, in the construction of their new homes. They might accept less
expensive, smaller homes, or might pay the higher price and forego other spending. In any case, the
home represents less utility than it would have without the ESC costs.
Most of this lost surplus is simply transferred to producers, as buyers are expected to pay more to
builders for the added stormwater measures. There is also some loss of producer surplus, however. A
higher price will discourage some buyers, so the number of homes or buildings sold will fall slightly.
Such reductions in sales result in losses of both consumer and producer surplus without any offsetting
gains. These losses are termed "deadweight losses," and they are losses to society as a whole.
The consumer and producer surplus losses and the deadweight losses are calculated within the
market models. The deadweight losses are included in the direct output losses calculated by the models
for each industry sector. The calculation of these losses is straightforward because the market models
assume linear supply and demand curves. Figure 4-3 shows how these calculations are performed. In the
figure, Area A is part of consumer surplus in the baseline scenario. It is lost to consumers, but is
transferred to producers and becomes a part of the producer surplus in the post-compliance scenario.
Area B is also part of consumer surplus in the baseline scenario. This area becomes the consumer portion
of the deadweight loss. Area C is producer surplus in the baseline scenario. It becomes producer surplus
lost absorbing new costs, but also becomes a stimulus to construction output. Area D is producer
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surplus in the baseline scenario. It becomes the producer portion of deadweight loss. Area E is part of
production output in the baseline scenario. It becomes lost sales and a loss in producer surplus. To
calculate the deadweight loss, the sum of Area B and D is calculated as one-half of the change in quantity
(the old quantity minus the new quantity) multiplied by the total compliance cost, using the area formula
for triangles ('A base x height). In this case, the base is the line showing the vertical shift of the supply
curve, which is equal to the total compliance costs, and the height is the change in quantity.
Old Supply
Price
Old Price
Demand
Old
Quantity Quantity
A = Cunsutr-ici surplus tiansferte-J to proujcei
B = Consumer sa'plus that becomes dyadwfgbt loss
C - Produce! surplus lost afasofDinu new costs out adds to construction uutcut
D = Producer surplus that necomes deadweight loss
E = Production output that Becomes Ids! sates
Figure 4-3. Consumer Surplus Loss, Producer Surplus Loss, and Deadweight Loss
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Chapter Five, Section 5.7, presents the losses in consumer surplus, losses in producer surplus, and
deadweight losses. For more detailed information, see also DCN 45024 in the Rulemaking Record.
Deadweight loss calculations are also discussed in Chapter Eight, where total social costs are presented.
4.3.3.3 Region al Impacts
For this analysis, EPA assesses whether the Final Action could have community- or regional-
level impacts and examines the potential impacts on specific regions. Such impacts could alter the
competitive position of the C&D industry across the nation or lead to growth or reductions in C&D
activity (in- or out-migration) in different regions and communities.
Traditionally, the distribution of C&D establishments has echoed the general regional distribution
of U.S. population, with some parts of the industry responding to short- or long-term shifts in population
distribution. EPA does not expect that the Final Action, regardless of option choice, will have a
significant impact on where C&D takes place or the regional distribution of C&D activity. On the one
hand, regulatory costs are estimated to be lower in regions with lower rainfall and reduced soil
erodability. These factors favor projects being developed in such regions. At the same time, however, a
project located in a low rainfall region would rarely be a perfect substitute for the same project in a high
rainfall region. So many factors go into a decision on location that the relative costs of stormwater
controls are unlikely to exercise a strong influence on project location. Thus EPA does not expect the
Final Action to significantly influence the prevailing pattern of C&D activity, regardless of option choice.
EPA's market model accounts for regional market influences by creating state and MSA level
partial equilibrium models for each sector. These models are used to quantify the regional impacts in
terms of output and employment. As for the national employment effects, state employment changes are
calculated using RIMS II multipliers. Regional multipliers were not available for this analysis, so EPA
used the national multipliers. The results, therefore, overstate the employment impacts within the region,
but indicate the effect of changes within the region on the nation as a whole. Chapter Five, Section 5.6,
includes tables summarizing state impacts.
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4.3.3.4 International Trade
As part of its economic analysis, EPA has evaluated the potential for changes in U.S. trade
(imports, exports) of C&D-related goods and services. A significant component of the U.S. C&D
industry operates internationally, and numerous foreign firms operate in the United States. EPA judged,
however, that the potential for U.S. C&D firms to be differentially affected by the Final Action is
negligible. The Final Action will be implemented at the project level, not the firm level, and will only
affect projects within the United States. All firms undertaking such projects, domestic or foreign, will be
subject to the Final Action. U.S. firms doing business outside the United States will not be differentially
affected compared to foreign firms, regardless of option chosen. Similarly, foreign firms doing business
in the United States will not be differentially affected.
The Final Action could stimulate or depress demand for some construction-related goods. To the
extent that the Final Action acts to depress the overall construction market, demand for conventional
construction-related products could decline. This decline could be offset by the purchase of goods and
services related to stormwater management. Overall, EPA does not anticipate that any shifts in demand
for such goods and services resulting from the Final Action will have significant implications for U.S. or
foreign trade.
4.3.4 Government Impacts
Government impacts are measured as the costs associated with changes to state regulations that
might be necessitated by the Final Action. These administrative costs are incurred when states bring their
own regulations into line with option requirements. In addition, governments build or hire contractors to
build a large fraction of developed space in any given year. For these projects, EPA assumes that a
portion of the costs associated with meeting the Final Action requirements, if any, would be passed
through to local, state, and federal governments. The following sections discuss EPA's methodology for
assessing these costs to governments.
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4.3.4.1 Admin istrative Costs
EPA has analyzed the administrative costs to governments associated with the Final Action. EPA
assumes that the majority of construction-related regulatory costs would be associated with processing
general permits. As noted previously, EPA assumes that the NPDES Phase I and Phase II stormwater
permit programs are fully implemented and that any new regulatory requirements would be superimposed
on these programs.
Under Option 1, EPA assumes that no incremental costs would be imposed on governments.
Under Options 2 and 4, EPA estimates that each state would incur costs to revise existing regulations to
reflect the shift of regulatory coverage from Part 122 to Part 450. EPA assumed that all states would
change their stormwater programs to include certification of sedimentation basins and other aspects of the
options considered, and EPA estimated the costs associated with making these changes. The costs are
based on assumptions about the number of labor hours states would allocate to amending such programs
and the applicable labor rate. The methodology remains the same as that for the proposal. Further details
on these assumptions and costs can be found in the Technical Development Document for the proposal
(U.S. EPA, 2002d).
4.3.4.2 Complian ce Costs
EPA estimates that government entities (federal, state, and local) commission as much as one
quarter of the total value of construction work completed in the United States each year. As final owner
of a substantial amount of the industry output, governments will bear some of the compliance costs
associated with the Final Action, unless Option 3 is chosen, assuming that these costs are passed on from
developers and builders. In Chapter Five, Section 5.8, EPA allocates the government share of compliance
costs, based on the government share of industry output. Further details about government costs can also
be found in Chapters Eight and Nine.
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4.3.4.3 Impacts Associated With NSPS
Under Options 2 and 4, EPA is defining a "new source" (under Part 450) as: "any source of
stormwater discharge associated with construction activity that results in the disturbance of at least 5
acres total land area that itself will produce an industrial source from which there may be a discharge of
pollutants regulated by some other new source performance standard in Subchapter N"30 (33 U.S.C. sec.
1316(a)(2)). This definition means that the land-disturbing activity associated with constructing a
particular facility would not constitute a "new source" unless the results of that construction yield a "new
source" regulated by other new source performance standards. Construction activity that is associated
with building a new pharmaceutical plant covered by 40 CFR 439.15, for example, would be subject to
new source performance standards under §450.24. EPA has sought comment on whether no sources
regulated under Option 2 should be deemed "new sources,", as construction activity itself is outside the
scope of section 306 of the Clean Water Act (CWA).31 Several commenters indicated that the language in
this section specifically excludes construction activities from being considered new sources. For the
purpose of this analysis, EPA continues to assume that construction activities can be considered new
sources.
Under the new definition, EPA believes that the NSPS standards could trigger a National
Environmental Policy Act (NEPA) review process for those C&D activities permitted by EPA. To assess
the potential impact of such a result, EPA examined NPDES construction permitting data for 19 states
with permitting systems fully or partially administered by EPA. In 2000, the number of permits
administered by EPA was 8,563. EPA believes, however, that by the time EPA implements the Final
Action, the states of Florida, Maine, and Texas (currently fully administered by EPA) will have assumed
permitting authority for construction activities. In 2000, the number of permits administered by EPA,
excluding these three states, was 1,454.
The NPDES permitting data does not include sufficient detail to indicate the number of sources
that could be new sources covered by CWA section 306. EPA notes, however, that in a 1999 study of 14
30 All new source performance standards promulgated by EPA for categories of point sources are codified
in Subchapter N.
31 "The term 'new source' means any source, the construction of which is commenced . .." 33 U.S.C. sec.
1316(a)(2)(emphasis added).
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communities, slightly less than 1 percent of construction permits were for industrial facilities (U.S. EPA,
1999; see Table 4-13). Based on this statistic, EPA believes that the number of construction permits for
new sources (regulated under Subchapter N) that would be administered by EPA is likely to be small.
EPA has not, therefore, estimated any potential costs for NEPA review as part of this economic analysis.
4.4 REFERENCES
Benshoof, M. 2001. An Inside Look at Builders' Books. Housing Economics. National Association of
Home Builders, May.
CCH. 1999. 2000 U.S. Master Tax Guide. Chicago: CCH Incorporated.
CWP. 2001. Impervious Cover and Land Use in the Chesapeake Bay Watershed. Ellicott City,
Maryland: Center for Watershed Protection, January. Additional data table, "Chesapeake Bay
Watershed Impervious Cover Results by Land Use Polygon," received via a facsimile from Tetra
Tech, Inc., September 20, 2001.
ERG. 2001a. Non-Residential Building Permits Projection. Memorandum to George Denning, U.S.
EPA. May 21.
ERG. 2001b. Market Modeling for Construction and Development. Memorandum to George Denning,
U.S. EPA. June 29.
FHFB (Federal Housing Finance Board). 2001. Monthly Interest Rate Survey (MIRS) Periodic
Summary Tables. Available online at: http://www.fhfb.gov/MIRS/mirs.htm.
FHWA. 2001. Federal Highway Administration. Typical Interstate System Cost per Mile. Fax from C.
Duran, FHWA Office of Program Administration, to D. Metivier, ERG, Inc. September 19.
Grubb & Ellis. 2001. Office Market Trends: A Survey of the Nation's Office Markets. Summer.
Available online at: www. grubb-ellis.com.
Kone, D. L. 2000. Land Development, Ninth Edition. Home Builder Press of the National Association of
Home Builders. Washington, DC.
Luger, M.I. and K. Temkin. 2000. Red Tape and Housing Costs. New Brunswick, New Jersey: CUPR
Press.
NAHB (National Association of Home Builders). 2001a. Building a Balance: Cost Breakdown of a
Single-family Home. Available online at: http://www.nahb.com/housing issues/balance 2.htm.
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NAHB (National Association of Home Builders). 2002. Characteristics of New Multifamily Buildings
1987-1999. Available online at: http://www.nahb.com/multifamilv/characteristics.htm. Accessed
on May 29, 2001.
Rappaport, B.A., and T.A. Cole. 2000. 1997 Economic Census-Construction Sector Special Study:
Housing Starts Statistics-A Profile of the Homebuilding Industry. U.S. Census Bureau, July.
R.S. Means. 2000. Building Construction Cost Data, 58th Annual Edition. Kingston, Massachusetts:
R.S. Means Co.
Savage, H. A. 1999. Who Could Afford to Buy a House in 1995? Washington, DC: U.S. Census Bureau.
Supplemental material is available online at: http://www.census. gov/hhes/www/housing/hsgaffrd
/afford95/aff95 src .html.
U.S. Census Bureau. 1998. State and Metropolitan Area Data Book 1997-1998 (Fifth Edition).
Washington, DC: U.S. Government Printing Office.
U.S. Census Bureau. 1999. American Housing Survey for the United States: 1999. Available online at:
http: //www .census. gov/hhe s/www/housing/ahs/ahs99/tab212 .html.
U.S. Census Bureau. 2000a. Current Construction Report C25: Characteristics of New Housing, 1999.
Issued July 2000.
U.S. Census Bureau. 2000b. Current Construction Report C40: New Privately Owned Housing Units
Authorized, 1999. July.
U.S. Census Bureau. 2000c. 1997 Economic Census: Construction: Subject Series. January.
U.S. Department of Agriculture. 2000. 1997 Natural Resources Inventory Summary Report. Table 8.
Changes in Land Cover/Use Between 1992 and 1997. Available online at:
http://www.nhq.nrcs.usda.gov/NRI/1997/summarv report/original/table8.html.
U.S. Department of Commerce. 1996. Bureau of Economic Analysis. Regional Input/Output Modeling
System (RIMS II). Table A-24 - Total Multiplier, by Industry Aggregation for Output, Earnings,
and Employment. Washington, DC.
U.S. EPA. 1999. Economic Analysis of the Final Phase II Stormwater Rule. Washington, DC: U.S.
Environmental Protection Agency, Office of Wastewater Management. Month?
U.S. EPA. 2000. Guidelines for Preparing Economic Analyses. Washington, DC: U.S. Environmental
Protection Agency, Office of the Administrator. EPA 240-R-00-003. September.
U.S. EPA. 2001. Economic Analysis of the Proposed Revisions to the National Pollutant Discharge
Elimination System Regulation and the Effluent Guidelines for Concentrated Animal Feeding
Operations. Washington, DC: U.S. Environmental Protection Agency, EPA-821-R-01-001.
January.
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U.S. EPA. 2002a. Economic Analysis of Proposed Effluent Guidelines and Standards for the Construction
and Development Category. Washington, DC: U.S. Environmental Protection Agency, EPA 821-
R-02-008. May.
U.S. EPA. 2002b. Economic Analysis of the Final Revisions to the National Pollutant Discharge
Elimination System Regulation and the Effluent Guidelines for Concentrated Animal Feeding
Operations. Washington, DC: U.S. Environmental Protection Agency, EPA-821-R-03-002.
December.
U.S. EPA. 2002c. Economic Analysis of the Final Effluent Limitations Guidelines and Standards for the
Iron & Steel Manufacturing Point Source Category. Washington, DC: U.S. Environmental
Protection Agency, EPA-821-R-02-006. April.
U.S. EPA. 2002d. Development Document for the Effluent Guidelines for the Construction and
Development Point Source Category. Washington, DC: U.S. Environmental Protection Agency.
U.S. EPA. 2003. Economic and Environmental Benefits Analysis Document for the Final Effluent
Limitations Guidelines and Standards for the Metal Products & Machinery Point Source
Category. Washington, DC: U.S. Environmental Protection Agency, EPA-821-B-03-002.
February.
U.S. EPA. 2004. Development Document for Final Action for Effluent Guidelines and Standards for the
Construction and Development Category. Washington, DC: U.S. Environmental Protection
Agency, EPA-821-B-04-001. Month?
Wright, 1996. Paul H. Wright. Highway Engineering, Sixth Edition. New York: John Wiley & Sons.
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CHAPTER FIVE
ECONOMIC IMPACT ANALYSIS RESULTS
5.1 OVERVIEW OF THE ECONOMIC IMPACT ANALYSIS
This chapter presents the projected economic impacts of the regulatory options discussed in
Chapter Three on the C&D industry. In this chapter, EPA evaluates the costs of the options (presented in
2000 dollars) and the impacts of these costs using the methodology, models, and data described in
Chapter Four.
The economic impact methodology uses several approaches to assess the economic impacts of the
regulatory options on the industry. At the lowest level of analysis, EPA uses models to analyze the
impacts on construction projects and individual firms. For higher economic levels, EPA estimates the
total national compliance costs to the affected industries and the impact of those costs on consumers,
national and regional construction markets, output and employment at the industry and national level,
social welfare, and government entities responsible for building roads, schools, and other public facilities.
This chapter is organized as follows:
Section 5.2 presents the per-acre costs calculated using the engineering cost estimates
discussed in Chapter Four, Section 4.1.2. Three sets of costs are developed: costs per acre
over all acres developed (used, for example, to determine national level compliance
costs), costs per acre over acres both developed and affected by the provisions for
codifying the CGP in Options 2 and 4 (the "CGP-affected" acres-used for firm-level and
small business analyses), and state-specific costs per acre (used in EPA's regional market
analyses). These per-acre costs are used as direct or indirect inputs to all of the other
analyses in this report.
Section 5.3 presents EPA's analysis of the economic impacts of the options considered
for the Final Action on model C&D projects using EPA's project modeling system,
C&D/PrMS. These results are based on the financial analyses developed for
representative projects in Chapter Four, Section 4.2.1.
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Section 5.4 presents the results of EPA's analysis of the impacts of the options
considered on model C&D firms using EPA's firm-level modeling system (C&D/FrMS).
This section examines the impact of the incremental compliance requirements on the
financial condition of representative firms, using data on their present financial condition
as a baseline. It also presents EPA's analysis of financial stress, potential employment
effects, and potential barriers to entry—that is, how the incremental costs of the options
considered could affect the ability of new businesses to enter the market. These estimates
are based on the methodologies outlined in Chapter Four, Section 4.2.2.
Section 5.5 presents EPA's estimates of the national costs of the options considered. EPA
determined those costs by multiplying the per-acre compliance costs by estimates of the
number of acres developed annually, subject to the options considered. Chapter Four,
Section 4.3.1 presents EPA's methodology for calculating these costs.
Section 5.6 presents EPA's market model analyses. This section considers the impact of
the incremental compliance requirements on U.S. consumers of building projects, using
EPA's Consumer Impact Model. It also estimates the impacts on regional and national
construction markets, using EPA's partial equilibrium market modeling system
(C&D/PEqMMS). The methodologies for these analyses were presented in Chapter
Four, Section 4.3.2.
Section 5.7 presents EPA's estimates of net economic impacts, including impacts on
economic output, employment and social welfare, regions and communities, and
international trade, using methodologies discussed in Chapter Four, Section 4.3.3.
Section 5.8 presents EPA's analysis of potential impacts on government units. This
section considers the options' various costs to governments using methodologies
summarized in Chapter Four, Section 4.3.4.
Section 5.9 presents EPA's analysis of additional impacts of the options considered. This
section discusses EPA's obligation to consider EO 12866 requirements and presents an
assessment of the potential for the Final Action to affect environmental justice and
children's health.
As discussed in Section One, EPA's results reflect an assumption of 100 percent compliance with
the Phase I & II stormwater requirements and state requirements as the baseline against which to judge
regulatory impacts and 100 percent compliance with the Final Action. See also the discussion of the
baseline in Chapter Four, Section 4.1.1.
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5.2
CALCULATION OF PER-ACRE COSTS
EPA engineers calculated the total cost of design, installation, and maintenance by state,
separated into site size and land use categories. These costs took into account variations in environmental
conditions and current state requirements that are considered equivalent to the options considered. EPA
used three approaches to compute cost-per-acre inputs to the economic models:
Approach 1 used the total national costs by site size and land use type (e.g., single-family
residential) with the total number of acres estimated to be developed annually (and
subject to the option under consideration) by site size and land use type to calculate a
national weighted average cost per acre for each option (see Chapter Four, Section 4.3.1).
These cost estimates were used to estimate, for example, total compliance costs and
national average house price increases.
Approach 2 used the compliance costs in states considered not to have stormwater
requirements equivalent to the provisions for codifying the CGP in Options 2 and 4 with
the acreage in those states, as determined by EPA's engineering cost analysis. These
acres are considered the CGP-affected acres. These costs, by site size and land use type,
are used in the firm-level and small business analyses to more precisely determine counts
of firms that might be adversely affected by the options.
Approach 3 used the total costs for each state with each state's estimate of developed
acreage (also output by EPA's cost models) to compute a state-specific cost per acre for
the four major land use types. These costs per acre were used in EPA's regional market
analysis to produce state-specific market results. See EPA's Technical Development
Document (U.S. EPA, 2004) for more information on the engineering cost models.
Table 5-1 presents the number of acres used to calculate the per-acre costs in Approaches 1 and 2,
above. Only Options 1, 2, and 4 are presented; Option 3 is the no-action option. As the table shows, the
number of CGP-affected acres is about two-thirds of the total number of developed acres estimated under
Options 2 and 4. Note also that the difference in developed acres between Option 1 and Options 2 and 4 is
related to the scopes of these options. Option 1 applies to sites of an acre or more, whereas Options 2 and
4 apply to sites of 5 acres or more.
During the calculation of the costs per acre using any of the acreage estimates, EPA also adjusts
the costs by a multiplier or multipliers that account for the fact that compliance costs drive increases in
other construction costs that depend on the magnitude of total construction costs. Costs that increase as
construction costs increase are the opportunity and/or interest costs associated with larger loans or
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additional working capital tied up in the construction project. Additionally, profits (if maintained at the
same percentage as in the baseline) and overhead also increase as costs increase. See Chapter Four,
Section 4.2.2 for more information on how EPA uses these multipliers in the various analyses in this EA.
In general, EPA uses total cost multipliers (which account for opportunity and interest costs and increases
in total profits and overhead) to estimate the potential for increases in asking price when EPA assumes
100 percent cost passthrough to consumers, but uses only opportunity and interest multipliers to estimate
the costs and impacts of the various options on industry. See DCN 45023 in the Rulemaking Record to
see how these multipliers are calculated within each model.
Table 5-1. Number of Acres Used to Calculate per Acre Costs
Option/
Site Size
Single Family
Multifamily
Commercial
Industrial
Total
Acres
Affected
Acres
Total
Acres
Affected
Acres
Total
Acres
Affected
Acres
Total
Acres
Affected
Acres
Option 1
3 acres
32,796
32,796
22,224
22,224
271,377
271,377
14,796
14,796
7.5 acres
49,575
49,575
33,848
33,848
163,845
163,845
6,683
6,683
25 acres
209,650
209,650
131,425
131,425
577,850
577,850
17,700
17,700
70 acres
99,960
99,960
51,240
51,240
319,550
319,550
18,200
18,200
200 acres
141,800
141,800
12,200
12,200
0
0
0
0
Option 2
3 acres
32,796
0
22,224
0
271,377
0
14,796
0
7.5 acres
49,575
49,575
33,848
33,848
163,845
163,845
6,683
6,683
25 acres
209,650
209,650
131,425
131,425
577,850
577,850
17,700
17,700
70 acres
99,960
99,960
51,240
51,240
319,550
319,550
18,200
18,200
200 acres
141,800
141,800
12,200
12,200
0
0
0
0
Option 4
3 acres
32,796
0
22,224
0
271,377
0
14,796
0
7.5 acres
49,575
32,078
33,848
21,900
163,845
105,983
6,683
4,335
25 acres
209,650
135,600
131,425
85,000
577,850
373,800
17,700
11,450
70 acres
99,960
64,680
51,240
33,110
319,550
206,780
18,200
11,760
200 acres
141,800
91,800
12,200
7,800
0
0
0
0
Source: EPA estimates. See Chapter Four.
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Table 5-2 shows the costs per acre derived using the total acres developed annually by site size
and land use type for all options. Note that these costs are in 2000 dollars as they are throughout Chapter
Five. The Preamble to the Final Action, however, presents costs in 2002 dollars. These costs reflect the
use of the opportunity and interest cost multiplier, so these are the costs used to estimate the total national
costs of compliance.
Table 5-2. Costs per Acre Over All Developed Acres (All Dollar Values are in Constant,
Pre-tax, 2000 Dollars)
Option/Site Size
Single-Family
Multifamily
Commercial
Industrial
Option 1
3 acres
$145.70
$145.70
$145.70
$145.70
7.5 acres
$113.30
$113.30
$113.30
$112.90
25 acres
$84.50
$84.50
$84.50
$84.70
70 acres
$61.50
$61.30
$61.40
$60.90
200 acres3
$64.50
$68.20
$0.00
$0.00
Option 2
3 acresb
$0.00
$0.00
$0.00
$0.00
7.5 acres
$258.90
$292.20
$308.50
$339.90
25 acres
$207.10
$228.60
$239.10
$260.70
70 acres
$183.20
$203.80
$215.10
$232.80
200 acres3
$187.20
$210.40
$0.00
$0.00
Option 4
3 acresb
$0.00
$0.00
$0.00
$0.00
7.5 acres
$148.90
$182.10
$198.40
$230.30
Option/Site Size
Single-Family
Multifamily
Commercial
Industrial
25 acres
$124.50
$146.00
$156.60
$178.00
70 acres
$124.10
$144.90
$156.10
$174.40
200 acres3
$125.20
$144.90
$0.00
$0.00
"EPA estimates that there are no 200-acre projects in the commercial and industrial sectors.
b Not in scope.
Source: EPA estimates. See Chapter Four.
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Table 5-3 shows the costs per acre over CGP-affected acres for Options 2 and 4 (also adjusted by
the opportunity and interest cost multiplier). As expected, the per acre costs calculated using "CGP-
affected" acres in Table 5-3 are higher than their counterparts in Table 5-2.
Table 5-3. Costs per Acre over CGP-Affected Acres (All Dollar Values are in Constant, Pre-
tax, 2000 Dollars)
Option/Site Size
Single-Family
Multifamily
Commercial
Industrial
Option 2
3 acresa
$0.00
$0.00
$0.00
$0.00
7.5 acres
$615.47
$683.58
$717.12
$778.23
25 acres
$686.28
$780.14
$825.72
$920.91
70 acres
$643.24
$736.66
$781.35
$868.34
200 acresb
$655.46
$801.18
$0.00
$0.00
Option 4
3 acres3
$0.00
$0.00
$0.00
$0.00
7.5 acres
$505.40
$573.50
$607.10
$668.50
25 acres
$603.70
$697.60
$743.20
$838.20
70 acres
$584.20
$677.70
$722.40
$809.90
200 acresb
$593.40
$735.60
$0.00
$0.00
aNot in scope.
bEPA estimates that there are no 200-acre projects in the commercial and industrial sectors.
Source: EPA estimates. See Chapter Four.
5.3 ANALYSIS OF IMPACTS ON C&D PROJECTS
Section 5.3.1 summarizes the methodologies and assumptions used to generate the results of
EPA's C&D/PrMS. The results of these analyses in terms of impacts on prices paid by consumers and
project profits are provided in Section 5.3.2.
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5.3.1 Overview of Methodology and Assumptions Used in the C&D/PrMS
Within the C&D/PrMS, EPA has created 24 model projects covering six site sizes and four land
use types to account for four major types of construction and development, as well as one model for
analyzing impacts on nonbuilding construction. The following sections discuss the types of projects
analyzed (Section 5.3.1.1), the baseline conditions generated by the models (Section 5.3.1.2), and the cost
passthrough assumptions that are used to generate two sets of results (Section 5.3.1.3).
5.3.1.1 Types an d Sizes of Projects An alyzed
Chapter Four, Section 4.2.1, defines a series of model projects. EPA uses these models to analyze
the impact of the options on two alternative targets: the typical developer-builder (assuming that they
absorb the incremental costs) and the typical consumer (assuming that the same costs are passed on to the
buyer). EPA has developed model projects for each of the following:
A residential development of single-family homes.
A residential development of multifamily housing units.
A commercial development (enclosed shopping center).
An industrial development (industrial park).
Impacts on nonbuilding projects are also presented separately, as represented by an analysis of
highway construction projects. See Section 5.2.4.
For each type of model project (other than nonbuilding construction), EPA analyzed costs and
impacts for a range of project sizes: 1, 3, 7.5, 25, 70, and 200 acres.1 The model projects incorporate all of
the baseline costs associated with developing a site and completing construction of all housing units or
buildings on the site. Accordingly, EPA assumes that the baseline costs include the costs of complying
with existing Phase I and Phase IINPDES stormwater regulations as they would apply to the site (100
1 The 1-acre project is actually representative of projects under an acre in size. Since projects of this size
are not within the scope of any of the options considered for the Final Action, the EA does not present any of the
results of these models.
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percent compliance baseline). The model then allows EPA to assess the incremental impact of additional
requirements imposed under the options considered. Chapter Four, Section 4.2.1 provides a detailed
description of the model project characteristics, assumptions, and data sources, including an itemized
listing of project cost elements.
5.3.1.2 Project Model Baselin e Per for man ce
Under the baseline assumptions and conditions, EPA calculates the sales price for each housing
unit (or model commercial or industrial building) and determines the baseline builder-developer profit
level based on the sales price. Builder-developer pre-tax profit is assumed to be approximately 10 percent
of the building sales price. Table 5-4 shows the baseline sales price and profit for each model project type
and each project size. Data and assumptions underlying these estimates are derived in Chapter Four,
Section 4.2.1. See the Rulemaking Record for the individual baseline results of each of the component
models. The model results presented later in this section show the changes from these baseline values
under each regulatory option.
5.3.1.3 Cost Pasthrough Considerations
The model projects are calibrated to allow analysis under varying assumptions about the degree
of cost passthrough from the builder-developer to the buyer.2 Existing literature and industry information
suggests that, particularly in the important single-family home market, pass through of regulatory costs in
the new housing market is close to 100 percent (e.g., Luger and Temkin, 2000). The actual incidence of
regulatory costs, however, would depend closely on local market conditions. To illustrate the range of
possible impacts, EPA has calculated its model results under the extreme conditions of 100 percent and
zero percent cost passthrough. The results of each analysis provide upper and lower bounds of impact on
industry and consumers. Accordingly, for each sector modeled, there are two sets of results reported.
2 Cost pass-back to the landowner is possible, but occurs infrequently. See Section 4.2.1. Since EPA
lacks data on the actual incidence and extent of cost pass-back, it is not analyzed in detail.
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Table 5-4. Baseline Sales Price and Profit Conditions for the Model Projects (All Dollar
Values are in Constant, Pre-tax, 2000 Dollars)
Project Type and Size (acres)
Calculated Building Sales Price
($)
Builder-Developer Pre-tax Profit
($)
Single-Family Residential
3 acres
$316,099
$31,610
7.5 acres
$316,099
$31,610
25 acres
$315,943
$31,594
70 acres
$316,043
$31,604
200 acres
$316,060
$31,606
Multifamily Residential
3 acres
$5,389,995
$539,000
7.5 acres
$13,474,991
$1,347,499
25 acres
$44,916,775
$4,491,677
70 acres
$125,766,936
$12,576,694
200 acres
$359,334,211
$35,933,421
Commercial
3 acres
$4,496,339
$449,640
7.5 acres
$11,240,999
$1,124,100
25 acres
$37,469,920
$3,746,992
70 acres
$104,915,760
$10,491,576
200 acres
$299,759,358
$29,975,936
Industrial
3 acres
$2,852,899
$285,290
7.5 acres
$7,132,197
$713,220
25 acres
$23,773,989
$2,377,399
70 acres
$66,567,119
$6,656,712
200 acres
$190,191,761
$19,019,176
Source: EPA estimates based on the methodologies presented in Chapter Four, Section 4.2.1. See DCN 45023 for
detailed model spreadsheets.
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Under 100 percent cost passthrough, all incremental regulatory costs resulting from the options
considered are passed through to end consumers. Under this approach, the costs are also assumed to be
marked up to the same degree as other project costs.3 Consumers feel the impact of the regulations in the
form of a higher price for each new building or housing unit. With zero cost passthrough, the incremental
regulatory costs are assumed to accrue entirely to the builder-developer, and appear as a reduction in per-
project profits. EPA determines this reduction by fixing the final sales price of the housing units and
calculating the builder's profit on that project once the regulatory costs are absorbed.
5.3.2 Results of the Project-Level Analysis
A summary of the impacts of Options 1 through 4 on projects in the four major land use
categories (single-family residential, multifamily residential, commercial, and industrial) is presented in
Section 5.3.2.1. Results for the simpler, nonbuilding construction model, as represented by the highway
construction sector, are presented in Section 5.3.2.2. Detailed results for all of these models (except the
nonbuilding model) can be found in the Rulemaking Record (DCN 45023).
5.3.2.1 Results for the Building Construction Sectors
Table 5-5a contains a summary of the model results for each option considered for the Final
Action under the 100 percent cost passthrough assumption, while Table 5-5b contains a summary of the
results under the assumption of zero cost passthrough. In Table 5-5a (100 percent cost passthrough), the
impacts of the regulatory options are summarized as the minimum and maximum percentage increase in
the sales price over all sizes of model projects within the land use type shown. In Table 5-5b (zero cost
passthrough), the impacts of the regulatory options are similarly summarized as the minimum and
maximum percentage decrease in builder profits. Detailed results for each model project by land use type
and size can be found in the Rulemaking Record (DCN 45023).
3 The cost markup assumptions (the total cost multipliers) are built into the model and are explained in detail in
Chapter Four.
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Table 5-5a. Impact of Regulatory Options on Model Project Financials—100 Percent Cost
Passthrough, Summarized Across All Project Sizes
Option
Percent Change in Project Price to Buyer
Single-Family
Multifamily
Commercial
Industrial
Min
Max
Min
Max
Min
Max
Min
Max
1
0.00%
0.04%
0.00%
0.02%
0.00%
0.02%
0.00%
0.03%
2
0.00%
0.19%
0.00%
0.13%
0.00%
0.11%
0.00%
0.19%
3
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
4
0.00%
0.16%
0.00%
0.12%
0.00%
0.10%
0.00%
0.17%
Source: EPA estimates based on the methodologies presented in Chapter Four, Section 4.2.1 using costs shown in
Table 5-2. See DCN45023 for detailed, model-specific results.
Table 5-5b. Impact of Regulatory Options on Model Project Financials—Zero Percent Cost
Passtrough, Summarized Across All Project Sizes
Option
Percent Change in Project Profits
Single-Family
Multifamily
Commercial
Industrial
Min
Max
Min
Max
Min
Max
Min
Max
1
0.00%
-0.38%
0.00%
-0.17%
0.00%
-0.17%
0.00%
-0.27%
2
0.00%
-1.67%
0.00%
-1.17%
0.00%
-0.95%
0.00%
-1.67%
3
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
4
0.00%
-1.47%
0.00%
-1.05%
0.00%
-0.86%
0.00%
-1.52%
Source: EPA estimates based on the methodologies presented in Chapter Four, Section 4.2.1, using costs presented
in Table 5-2. See DCN45023 for detailed, model-specific results.
Under the 100 percent cost passthrough assumption, EPA estimates that sales prices will rise no
more than an average of 0.19 percent for single-family residential, 0.13 percent for multifamily
residential, 0.11 percent for commercial, and 0.19 percent for industrial land use categories. All of the
maximum impacts occur under Option 2.
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Under the zero cost passthrough assumption, the impacts on builders' profits range from a
minimum of no change for all project types under the various options to maximum impacts on builders'
profits (measured as percent declines in those profits) of under 2 percent for all options and land use
types. Maximum impacts all occur under Option 2 as follows:
Single-family residential: -1.67 percent
Multifamily residential: -1.17 percent
• Commercial: -0.95 percent
Industrial: -1.67 percent
5.3.2.2 Results for the Nonbuilding Construction Sectors
This section presents the results of the model nonbuilding project analysis described in Chapter
Four, Section 4.2.1.1.3. As indicated in that section, EPA has not developed actual engineering costs for
projects such as roads and highways. As a result, EPA has simulated the impact of the options considered
on such projects using worst-case (i.e., highest) estimates of the per-acre engineering costs estimated for
building projects.
Due to the lack of engineering costs for this project type, EPA used a "worst-case" assumption of
$113 per acre in compliance costs for Option 1, $778 for Option 2, and $669 for Option 4. This figure is
based on the highest per-acre compliance cost estimated for a 7.5-acre building project. EPA elected to
use the compliance costs for a 7.5-acre project because the model for one mile of a new highway
construction project encompasses 10.67 acres. EPA estimates that the baseline costs of construction for
one mile of typical road or highway is $5.4 million (see Section 4.2.7). Using the costs per acre shown
above, the worst-case estimate of compliance costs associated with one mile of new road or highway
construction (10.67 acres) under the highest cost option is about $8,300. This equates to less than 0.2
percent of baseline costs, indicating that even under worst-case assumptions regarding compliance costs,
the options considered are unlikely to have a significant impact on representative nonbuilding
construction. Given these small impacts, as well as the small impacts in the other C&D industry sectors,
EPA believes the options will have a similarly small impact on projects other than highway construction
in the heavy construction sector.
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5.4
ANALYSIS OF IMPACTS ON MODEL FIRMS
5.4.1 Overview of Methodology and Assumptions Used
EPA undertakes a firm-level analysis to examine the impacts of the compliance costs associated
with multiple C&D projects on a group of model firms that characterize the financial conditions of
"typical" businesses in each of the four major industry sectors (single-family residential, multifamily
residential, commercial, and industrial construction) and the nonbuilding construction sector, represented
by highway construction. EPA uses its C&D/FrMS to simulate the impact of the incremental compliance
costs on the balance sheet and cash flow of 14 model firms, which expresses the impacts in terms of
changes in meaningful business financial ratios. The ratios used in the analysis include:
Gross profit ratio.
• Return on net worth.
Current ratio.
Debt to equity ratio.
These ratios are reviewed in Chapter Four, Section 4.2.2.
EPA determined the baseline characteristics of the model firms for the four major construction
sectors by firm size and industry sector, then used the per-acre costs (derived for Options 2 and 4 using
the CGP-affected acreage) and assumptions of numbers of projects undertaken by the various firm models
to determine the impact of those costs on the ratios listed above. The reason EPA uses cost calculated
over CGP-affected acreage here is that the Agency is calculating a total number of firms affected, not a
national average of a certain impact measure. The use of the cost per acre over all acres developed could
understate the number of firms estimated to experience financial stress under Options 2 and 4, as a
comparison of Tables 5-2 and 5-3 will indicate. EPA thus uses the higher cost per acre over CGP-
affected acres. EPA also uses the state-specific number of firms in each of the C&D sectors analyzed to
compute the total number of firms estimated to experience financial stress on a state-by-state and total
national basis. In this way, although EPA did not have sufficient data to create state-specific firm models,
EPA was able to calculate state-based differences in average per-acre costs driven by differences in
EPA's assessments of state equivalencies to the regulatory options.
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Within the C&D/FrMS, EPA also developed a simple highway construction firm model. The
model establishment analysis for heavy construction follows the basic methodology outlined in Section
4.2.2 for firms in the commercial and industrial construction industries. As previously discussed, this
analysis focuses on highway and street construction contractors (NAICS 23411) due to the lack of
financial data for other segments of the heavy construction industry group (NAICS 234). EPA has
determined that the median highway construction firm (NAICS 23411), based on revenues, is in the 50 to
99 employee size classification category as defined by Census (U.S. Census, 2000). Within this
employment size class, EPA calculates average establishment revenues, employment, and costs as
discussed in Section 4.2.1.2.
For the model highway construction firm, EPA examines the economic impacts of the worst-case
compliance cost impacts on the same four financial ratios discussed above for the residential, commercial,
and industrial construction industries. Due to the lack of actual engineering cost estimates for highway
construction, the compliance costs used in this analysis do not correspond to a particular regulatory
option. Compliance costs for 7.5-acre projects were chosen for this analysis because they are closest in
size to the model highway construction project assumed to be undertaken by the model establishment,
which encompasses 10.67 acres.
Once the costs of compliance are input to the models, EPA identifies how the financial ratios
change relative to the baseline (see Chapter Four, Section 4.2.2.2.2, for more information on this
methodology). Following this analysis, EPA estimates the number of firms expected to experience
financial stress and the employment associated with those firms (see Chapter Four, Section 4.2.2.2.3 for
more details). Firms expected to experience financial stress are assumed to need to change their business
operations. In the worst-case, this might mean the firm must downsize or close, but these are the
extremes of actions firms might need to take to adjust to changing business conditions. Effects on
employment, therefore, might not materialize.
To perform the financial ratio analysis, EPA examines a weighted average of changes in the
current ratio, debt to equity ratio, and return on net worth ratios. EPA then constructs a cumulative
distribution function for each ratio to estimate the percentage of establishments that would most likely fall
below "critical" values after incurring compliance costs. The percentage falling below these critical
values, multiplied by the number of firms represented by the model under evaluation, results in a
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projected number of firms estimated to experience financial stress. EPA calculates potential employment
effects by multiplying the number of establishments projected to close by employment estimates for the
model facility representing those closures.
Section 5.4.1.1 discusses the types and sizes of firms modeled; Section 5.4.1.2 presents the
baseline ratio calculations for the models developed, and Section 5.4.1.3 discusses the cost passthrough
assumptions used to develop two sets of results.
5.4.1.1 Types an d Sizes of Firms
EPA created 14 model firms. These model firms represent six firm sizes in the single-family
residential construction sector, five firm sizes in the multifamily residential construction sector, and one
median-sized firm each in the commercial, industrial, and nonbuilding construction sectors. Firm size for
the two residential construction sectors are defined by numbers of starts or units constructed annually.
Median-size firms in the other sectors are defined by employee size.
5.4.1.2 Firm Model Baseline Performance
EPA calculates baseline values of the four financial ratios (gross profit ratio, return on net worth,
current ratio, and debt to equity ratio for all of the firm models discussed in Section 5.4.1.1, using the
financial parameters developed as discussed in Section 4.2.2.1.3. The baseline ratios for all of EPA's
firm level models are presented in Table 5-6. The ratios are the same for each industry type across all
sizes because of the proportionality assumptions used to create the size categories, although the financial
information does vary by size. See Chapter Four, Section 4.2.2 for how the firm model financials were
generated. The spreadsheets that contain all of the financial assumptions used to create these ratios for
each model firm can be found in the Rulemaking Record (DCN 45031).
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Table 5-6. Base
ine Financial Ratio Values
Industry Type
Baseline
Gross Profit
Baseline
Return on Net Worth
Baseline
Current Ratio
Baseline
Debt to Equity
Single Family
0.2280
0.0506
1.3936
1.9155
Multifamily
0.1900
0.4639
1.1265
3.0161
Commercial
0.1590
0.2442
1.5620
1.3364
Industrial
0.1840
0.2530
1.5979
1.2472
Heavy
0.2230
0.1983
0.1630
1.0619
5.4.1.3 CostPassthrough Considerations
As indicated in Chapter Four, Section 4.2.2, the C&D/FrMS simulations have been run under two
cost passthrough scenarios: (1) zero cost passthrough from the developer-builder to the consumer, and (2)
an estimated actual cost passthrough, where a "realistic" share of the compliance costs are passed though
to consumers in the form of higher prices. EPA has estimated a separate cost passthrough factor for each
market sector individually (see Section 4.2.2). The zero cost passthrough results represent the "worst
case" scenario for industry; impacts under the more realistic cost passthrough assumption are smaller than
those for the zero cost passthrough case.
5.4.2 Results of the Firm-Level Analysis
The following sections present the results of the C&D/FrMS analysis using the models developed
in Chapter Four, Section 4.2.2. Section 5.4.2.1 presents the results, measured as changes in financial
ratios. Section 5.4.2.2 provides estimates of numbers of firms estimated to experience financial stress and
numbers of potential employment effects for the four major building construction sectors and the highway
construction sector due to the options under consideration. Section 5.4.2.3 presents EPA's assessment of
the potential for the regulatory options to present a barrier to entry for new construction firms. These
results are summaries of detailed model results, which can be found in the Rulemaking Record (DCN
45029).
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5.4.2.1 Impacts on Financial Ratios
The financial ratio changes estimated to occur are presented under the two cost passthrough
scenarios discussed previously. Table 5-7a provides a summary of the results for each sector by
regulatory option, averaged over all project sizes, assuming all costs are absorbed by the firms (DCN
45028 presents each size result individually). The most severe impacts are measured by the impact on
return on net worth, followed by the gross profit, debt to equity, and current ratios. The largest impact is a
10.78 percent decline in the return on net worth ratio for the single-family residential sector under Option
2. With the exception of return on net worth, the remainder of the results are at or below -2.03 percent for
all project types.
Table 5-7b provides the same summary of financial ratios as Table 5-7a, but under the estimated
actual cost passthrough scenario. As the table shows, the results under the estimated actual cost
passthrough scenario indicate lower impacts than those shown in Table 5-8a, with impacts of less than -
1.5 percent for all financial ratios and all five project types, with most of the impacts being less than -0.3
percent (with the exception of return on net worth).
5.4.2.2 Impacts on Firm Financial Health and Employment
To estimate firm financial stress and potential employment effects, EPA analyzed changes in key
financial ratios that occur as firms' costs increase in response to the options considered. EPA again used
the costs per acre based on CGP-affected acres to gauge the impact of Options 2 and 4 on the financial
health of the building construction firms.
Financial Effects on Firms
Table 5-8a shows estimates of the number of firms expected to experience financial stress under a
zero cost passthrough assumption—the worst case scenario. Results under the "realistic" cost passthrough
assumption are presented in Table 5-8b. The largest number of firms estimated to experience financial
stress is projected to occur in the commercial sector (115 firms), followed by the single-family
5-17
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Table 5-7a. Impact of Regulatory Options on Model Firm Financial Performance (Zero Cost
Passthrough)
Construction
Industry and
Regulatory
Option
Percent Change in Financial Ratios, From Baseline3
Gross Profit
Return on Net Worth
Current Ratio
Debt to Equity
Min.
Max
Min.
Max
Min.
Max
Min.
Max
Single-family residential
Option 1
0.00%
-0.20%
0.00%
-2.31%
0.00%
-0.02%
0.00%
0.08%
Option 2
0.00%
-0.96%
0.00%
-10.78%
0.00%
-0.09%
0.00%
0.38%
Option 3
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Option 4
0.00%
-0.84%
0.00%
-9.49%
0.00%
-0.08%
0.00%
0.34%
Multifamily residential
Option 1
0.00%
-0.29%
0.00%
-0.92%
0.00%
-0.05%
0.00%
0.19%
Option 2
0.00%
-2.03%
0.00%
-6.01%
0.00%
-0.35%
0.00%
1.35%
Option 3
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Option 4
0.00%
-1.86%
0.00%
-6.54%
0.00%
-0.32%
0.00%
1.24%
Commercial
Option 1
0.00%
-0.15%
0.00%
-0.48%
0.00%
-0.02%
0.00%
0.12%
Option 2
0.00%
-0.86%
0.00%
-2.72%
0.00%
-0.12%
0.00%
0.67%
Option 3
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Option 4
0.00%
-0.78%
0.00%
-2.45%
0.00%
-0.11%
0.00%
0.60%
Industrial
Option 1
0.00%
-0.12%
0.00%
-0.39%
0.00%
-0.02%
0.00%
0.11%
Option 2
0.00%
-0.77%
0.00%
-2.48%
0.00%
-0.12%
0.00%
0.68%
Option 3
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Option 4
0.00%
-0.70%
0.00%
-2.26%
0.00%
-0.11%
0.00%
0.62%
Heavy Construction (Highway)
Worst Case
NA
-1.37%
NA
-4.23%
NA
-0.24%
NA
1.06%
Option 3
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
"Ranges (minimum and maximum) reflect results across model firms of varying sizes. See DCN 45028 for detailed
results.
Source: EPA estimates based on the methodologies presented in Chapter Four.
5-18
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Table 5-7b. Impact of Regulatory Options on Model Firm Financial Performance (Estimated
Actual Cost Passthrough3)
Construction
Industry and
Regulatory
Option
Percent Change in Financial Ratios, From Baselineb
Gross Profit
Return on Net
Worth
Current Ratio
Debt to Equity
Min.
Max
Min.
Max
Min.
Max
Min.
Max
Single-family residential
Option 1
0.00%
-0.03%
0.00%
-0.32%
0.00%
0.00%
0.00%
0.01%
Option 2
0.00%
-0.13%
0.00%
-1.48%
0.00%
-0.01%
0.00%
0.05%
Option 3
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Option 4
0.00%
-0.12%
0.00%
-1.31%
0.00%
-0.01%
0.00%
0.05%
Multifamily residential
Option 1
0.00%
-0.04%
0.00%
-0.13%
0.00%
-0.01%
0.00%
0.03%
Option 2
0.00%
-0.28%
0.00%
-0.84%
0.00%
-0.05%
0.00%
0.17%
Option 3
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Option 4
0.00%
-0.26%
0.00%
-0.91%
0.00%
-0.04%
0.00%
0.19%
Commercial
Option 1
0.00%
-0.01%
0.00%
-0.05%
0.00%
0.00%
0.00%
0.01%
Option 2
0.00%
-0.08%
0.00%
-0.26%
0.00%
-0.01%
0.00%
0.06%
Option 3
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Option 4
0.00%
-0.07%
0.00%
-0.23%
0.00%
-0.01%
0.00%
0.06%
Industrial
Option 1
0.00%
-0.02%
0.00%
-0.06%
0.00%
0.00%
0.00%
0.02%
Option 2
0.00%
-0.12%
0.00%
-0.40%
0.00%
-0.02%
0.00%
0.11%
Option 3
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Option 4
0.00%
-0.11%
0.00%
-0.36%
0.00%
-0.02%
0.00%
0.10%
Heavy Construction (Highway)
Worst-Case
NA
-0.22%
NA
-0.68%
NA
-0.04%
NA
0.17%
Option 3
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
aEPA applied the following estimated cost passthrough factors: Single-family residential, 86%; Multifamily
residential, 86%; Commercial, 91%; Industrial, 84%.
bRanges (minimum and maximum) reflect results across model firms of varying sizes. See DCN 45028 for detailed
results.
Source: EPA estimates based on the methodologies presented in Chapter Four.
5-19
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Table 5-8a. Estimated Numbers of Firms Expected To Experience Financial Stress (Zero Cost
Passthrough)
Option
Single-Family
Multifamily
Commercial
Number
Pet. of Total
Number
Pet. of Total
Number
Pet. of Total
1
5
0.0%
1
0.0%
19
0.0%
2
36
0.1%
10
0.2%
133
0.3%
3
0
0.0%
0
0.0%
0
0.0%
4
31
0.0%
9
0.2%
115
0.3%
Option
Industrial
Heavy
TOTAL
Number
Pet. of Total
Number
Pet. of Total
Number
Pet. of Total
1
4
0.1%
8
0.1%
37
0.0%
2
25
0.3%
54
0.5%
258
0.3%
3
0
0.0%
0
0.0%
0
0.0%
4
22
0.3%
35
0.4%
212
0.2%
Source: EPA estimates based on the methodologies presented in Chapter Four. See DCN 45029 for detailed results.
Table 5-8b. Estimated Number of Firms Expected To Experience Financial Stress
("Realistic" Cost Passthrough Assumption)
Option
Single-Family
Multifamily
Commercial
Number
Pet. of Total
Number
Pet. of Total
Number
Pet. of Total
1
1
0.0%
0
0.0%
2
0.0%
2
5
0.0%
1
0.0%
12
0.0%
3
0
0.0%
0
0.0%
0
0.0%
4
4
0.0%
1
0.0%
11
0.0%
Option
Industrial
Heavy
TOTAL
Number
Pet. of Total
Number
Pet. of Total
Number
Pet. of Total
1
1
0.0%
1
0.0%
5
0.0%
2
4
0.0%
9
0.1%
31
0.0%
3
0
0.0%
0
0.0%
0
0.0%
4
4
0.0%
6
0.1%
26
0.0%
Source: EPA estimates based on the methodologies presented in Chapter Four. See DCN 45029 for detailed results.
5-20
-------
residential sector (31 firms). Firm stress as a percent of total firms is, at most, 0.3 percent under all
options considered and for all industry sectors. As seen in Table 5-8b, firm impacts are even smaller when
estimated actual cost passthrough is accounted for. Impacts on the heavy construction sector not
represented by highway construction are expected to be similarly very small.
Potential Employment Effects
Table 5-9a presents employment effects analysis results under a zero cost passthrough assumption
to show the worst case scenario. Results under an estimated actual cost passthrough assumption are
presented in Table 5-9b.
Table 5-9a. Estimated Potential Employment Effects (Zero Cost Passthrough)
Option
Single-Family
Multifamily
Commercial
Number
Pet. of Total
Number
Pet. of Total
Number
Pet. of Total
1
131
0.0%
58
0.2%
267
0.0%
2
1,043
0.4%
494
1.4%
1,853
0.3%
3
0
0.0%
0
0.0%
0
0.0%
4
888
0.3%
420
1.2%
1,607
0.3%
Option
Industrial
Heavy
TOTAL
Number
Pet. of Total
Number
Pet. of Total
Number
Pet. of Total
1
65
0.0%
193
0.1%
714
0.0%
2
457
0.3%
1,331
0.5%
5,178
0.4%
3
0
0.0%
0
0.0%
0
0.0%
4
403
0.3%
803
0.4%
4,121
0.3%
Source: EPA estimates based on the methodologies presented in Chapter Four. See DCN 45029 for detailed results.
5-21
-------
Table 5-9b. Estimated Potential Employment Effects ("Realistic" Cost Passthrough
Assumption)
Option
Single-Family
Multifamily
Commercial
Number
Pet. of Total
Number
Pet. of Total
Number
Pet. of Total
1
18
0.0%
8
0.0%
25
0.0%
2
144
0.0%
69
0.2%
175
0.0%
3
0
0.0%
0
0.0%
0
0.0%
4
122
0.0%
59
0.2%
152
0.0%
Option
Industrial
Heavy
TOTAL
Number
Pet. of Total
Number
Pet. of Total
Number
Pet. of Total
1
10
0.0%
31
0.0%
92
0.0%
2
73
0.0%
212
0.1%
673
0.0%
3
0
0.0%
0
0.0%
0
0.0%
4
64
0.0%
128
0.1%
525
0.0%
Source: EPA estimates based on the methodologies presented in Chapter Four.
Potential employment impacts as a percentage of each sector's total employment are roughly the
same as the firm effects. This is to be expected, because EPA estimated potential employment effects by
multiplying projected numbers of firms experiencing financial stress by the number of employees per
firm. Note that in the multifamily sector, the percentage of potential employment effects is slightly higher
than the percentage of firms estimated to experience financial stress. This occurs because the model firms
most affected by the options considered account for a disproportionately high percentage of sector
employment. As before, the losses estimated using the actual estimated cost passthrough assumption are
less than those estimated using the zero cost passthrough assumption. In no case, however, does the
impact exceed 1.4 percent, even under the worst-case scenario of zero cost passthrough. Impacts on
employment in other heavy construction sectors not represented by highway construction are also
expected to be minimal.
5-22
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5.4.2.3 Barrier to Entry Results
This section presents the results of EPA's barrier to entry analysis for the five industry sectors. As
discussed in Section 4.2.2.2.4, EPA examined the ratio of compliance costs to current and total assets to
determine if new market entrants would find it more difficult to obtain construction loans to start a project
than would existing firms. As discussed in more detail in that section, this methodology is conservative
by design because it does not account for the fact that a firm would typically be expected to finance 20
percent of the incremental compliance costs to obtain the loan—not the full amount as assumed here.
This analysis is run only under the zero cost passthrough assumption. As shown in Table 5-10,
compliance costs represent a maximum of 1.7 percent of a model establishment's current assets (1.3
percent of total assets) across all options and project types (excluding highway construction). These
maximum projected impacts occur in the multifamily sector. For the industrial and commercial sectors,
compliance costs are less than 0.6 percent of current assets, while in the single-family sector, costs are
less than 0.4 percent of current assets. The impacts would be smaller under an estimated actual cost
passthrough scenario.
5.5 ANALYSIS OF NATIONAL COMPLIANCE COSTS
In this section, EPA presents an overview of the methodology used to compute the national
compliance costs of all options considered for the Final Action (Section 5.5.1). These national
compliance costs are then presented as totals by industry sector and option (Section 5.5.2) and on a per-
unit basis, also by industry sector and option (Section 5.5.3). Spreadsheets used to calculate these costs
are available in the Rulemaking Record (DCN 45039).
5.5.1 Overview of Methodology and Assumptions Used in the National Compliance Cost
Model
EPA calculates the national compliance costs associated with the options considered by
multiplying the compliance costs per acre (by project type and size; see Table 5-2) by estimates of the
5-23
-------
Table 5-10. Barrier to Entry Analysis (Zero Cost Passthrough)
Option
Compliance Costs Divided by:
Current Assets
Total Assets
Min.
Max.
Min.
Max.
Single-Family Residential
1
0.0%
0.1%
0.0%
0.1%
2
0.0%
0.4%
0.0%
0.3%
3
0.0%
0.0%
0.0%
0.0%
4
0.0%
0.4%
0.0%
0.3%
Multifamily Residential
1
0.0%
0.3%
0.0%
0.2%
2
0.0%
1.7%
0.0%
1.3%
3
0.0%
0.0%
0.0%
0.0%
4
0.0%
1.6%
0.0%
1.2%
Commercial
1
0.0%
0.1%
0.0%
0.1%
2
0.0%
0.6%
0.0%
0.5%
3
0.0%
0.0%
0.0%
0.0%
4
0.0%
0.5%
0.0%
0.3%
Industrial
1
0.0%
0.1%
0.0%
0.1%
2
0.0%
0.6%
0.0%
0.5%
3
0.0%
0.0%
0.0%
0.0%
4
0.0%
0.6%
0.0%
0.4%
Heavy (Highway Construction)
Worst Case
NA
1.2%
NA
0.7%
3
0.0%
0.0%
0.0%
0.0%
Source: EPA estimates based on the methodologies presented in Chapter Four.
5-24
-------
total number of acres developed per year (see Chapter Four, Section 4.3). EPA uses data from the USDA
NRI to estimate the number of acres developed per year. According to this source, approximately 2.2
million acres of undeveloped land are converted to a developed state every year. EPA has adjusted this
total to account for differences in regulatory coverage between Option 1 and Option 2.4 As described in
Chapter Four, Section 4.3, both the 14-Community Study (conducted in support of the Phase IINPDES
stormwater rule development) and building permits data from Census were used to allocate the developed
acreage by project type and size (U.S. EPA, 1999; U.S Bureau of the Census, 2000c).
EPA also calculates the national costs by unit, using numbers of single family homes and units
for multifamily residential construction and by square footage for commercial and industrial
development. Section 4.3.1.2 presents the estimates of units (in terms of numbers of houses, units, and
square footage) in the discussions concerning the distribution of numbers of developed acres by land use
type and size.
5.5.2 Estimate of Total National Compliance Costs
Table 5-11 contains EPA's estimates of the annual national costs of the regulatory options. The
national costs of the options considered range from $0 for each project type (Option 3) to maximums of
$143 million for single-family residential construction, $103 million for multifamily residential
construction, $296 million for commercial construction, and $13 million for industrial construction (all
Option 2).5
The combined annual national compliance costs across all sectors are shown in the final rows of
Table 5-11. The national compliance costs are $264 million under Option 1, $556 million under Option 2,
and $360 million under Option 4. Option 3, the no-action option, results in no incremental compliance
costs.
4 Option 1 applies to sites of one acre or more, while Option 2 applies to sites of five acres or more. Adjustments
are not made for Option 4, since it does not matter whether EPA multiplies cost per acre developed by total developed
acres or cost per acre affected by total affected acres.
5 Note that the costs to the heavy construction sector are accounted for, although the additional costs for
this sector are distributed among the four major industry sectors in proportion to their acreage (see Section 4.3.1.2).
5-25
-------
Table 5-11. Estimated Annual National Cost of Stormwater Control Options (All Dollar
Amounts Are in Constant, Pre-tax, 2000 Dollars)
Option
Estimated National Costs
($ 1,000)
Single-Family Residential
Option 1
$63,652
Option 2
$143,197
Option 3
$0
Option 4
$88,262
Multifamily Residential
Option 1
$45,820
Option 2
$103,234
Option 3
$0
Option 4
$65,200
Commercial
Option 1
$148,173
Option 2
$296,446
Option 3
$0
Option 4
$197,440
Industrial
Option 1
$6,458
Option 2
$12,797
Option 3
$0
Option 4
$8,979
Total
Option 1
$264,104
Option 2
$555,675
Option 3
$0
Option 4
$359,882
Source: EPA estimates.
5-26
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National costs reflect the absence of costs associated with developed acres in states where state
requirements are deemed equivalent to the options under consideration. See the Technical Development
Document (U.S. EPA, 2004) for a discussion of state equivalency. Chapter Four, Section 4.1.2.1
provides a summary of this information.
5.5.3 Estimates of Compliance Cost on a Per-Unit Basis
Table 5-12 shows the calculation of cost per unit for Options 1, 2, and 4. Units are "dollars per
house" and "dollars per unit" for single-family residential and multifamily residential construction,
respectively, and "dollars per square foot" for all other categories. Total costs are as shown in
Table 5-11 and include builders' opportunity and interest costs. In effect, Table 5-12 shows the cost per
unit assuming 100 percent cost passthrough. Units per acre were estimated in Section 4.3.1.2 and are
repeated in the table.
The cost to build a new single-family home increases by $44.66 under Option 1, $107.05 under
Option 2, and $65.98 under Option 4. The cost to build a new multifamily home increases by $17.66
under Option 1, $43.65 under Option 2, and $27.57 under Option 4. Costs per square foot for commercial
space and industrial space increase by 0.01 cent for Option 1, 0.03 and 0.04 cents respectively for Option
2, and 0.02 and 0.03 cents respectively for Option 4. The impacts of these cost increases on the markets
for new construction are explored in Section 5.6.
5.6 ANALYSIS OF IMPACTS ON CONSTRUCTION MARKETS
EPA uses three analytical approaches to estimate the potential impacts of the regulatory options
on the various construction and development markets and the impact of changes in those markets on
consumers of single family housing. These analyses use somewhat different underlying assumptions and
are thus not expected to produce the same results. Each analysis, however, provides slightly different
information. Combined, these analyses contribute to a better understanding of the magnitude of the
estimated impacts.
5-27
-------
Table 5-12. Calculation of Total Cost per Unit (Includes the Impact of Equivalent State
Programs; All Dollar Amounts Are in Constant, Pre-tax, 2000 Dollars)
Ratio
Single-Family
Multi-Family
Commercial
Industrial
Total
Option 1
Total Costs
$63,652,385
$45,820,378
$148,172,832
$6,458,434
$264,104,029
Total Acres
533,781
250,937
1,332,622
57,379
2,174,718
Cost per
Acre
$119.25
$182.60
$111.19
$112.56
Units per
Acre
2.67
10
8,320
8,555
Cost per Unit
$44.66
$17.66
$0.01
$0.01
Option 2
Total Costs
$143,196,670
$103,234,363
$296,446,381
$12,797,180
$555,674,594
Total Acres
500,985
228,713
1,061,245
42,583
1,833,525
Cost per
Acre
$285.83
$451.37
$279.34
$300.53
Units per
Acre
2.67
10
8,320
8,555
Cost per Unit
$107.05
$43.65
$0.03
$0.04
Option 4
Total Costs
$88,262,015
$65,200,328
$197,440,003
$8,979,489
$359,881,835
Total Acres
500,985
228,713
1,061,245
42,583
1,833,525
Cost per
Acre
$176.18
$285.08
$186.05
$210.87
Units per
Acre
2.67
10.34
8,320
8,555
Cost per Unit
$65.98
$27.57
$0.02
$0.03
Source: EPA estimates based on the methodologies presented in Chapter Four. See DCN 45039 for detailed results.
5-28
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The first approach measures impacts on consumers using EPA's Consumer Impact Model
(Section 5.6.1). The other two approaches are the basis of two of three modules in EPA's partial
equilibrium modeling system, C&D/PEqMMS. EPA's second approach and first module of the
C&D/PEqMMS, the National Housing Model, measures impacts on prices and quantities in the national
housing market (Section 5.6.2). The third approach and second module of the C&D/PEqMMS, the
Regional Market Modeling Module, estimates impacts on regional markets for all four major C&D
sectors (Section 5.6.3). The last module of the C&D/PEqMMS is the Net Economic Impact Model,
which is discussed in Section 5.7.
5.6.1 Analysis of Consumer Impacts
5.6.1.1 Overview of Methodology and Assumptions Used in the Consumer Impact Model
EPA analyzed the impacts on consumers using EPA's Consumer Impact Model. To estimate
worst-case impacts on consumers, EPA assumes that developers and builders pass on 100 percent of the
costs to the new single-family home buyer. EPA's model estimates the change in income needed to
qualify for financing to purchase the (higher priced) housing unit, and then estimates the change in the
number of households that would meet the higher income criteria. In theory, this provides an estimate of
the change in new housing demand that could arise as a result of the options considered. The
methodology for this model was discussed in Chapter Four, Section 4.3.2.1.
5.6.1.2 Estimates of Consumer Impacts
Table 5-13 shows that the incremental costs of the options considered add a maximum of $43 to
the $90,393 in income that is required to purchase the baseline model home, (i.e., a $43 increase in
income is needed to accommodate the most expensive option for the model representing the highest cost
per acre for a single family residence, (the 7.5-acre model). Given this qualifying income change,
between 0 and 15,000 households (0 percent to 0.09 percent of total qualifying households) would fail to
qualify for a mortgage for the median priced home.
5-29
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Table 5-13. Impact of Option Compliance Costs on Housing Affordability (All Dollar Amounts
Option
ESC
Costs
($/Unit)
Total
Change in
Costs
($/Unit)
Income
Needed to
Qualify ($)
Change in
Income
Needed ($)
Number of
Households
Shifted
(Thousands)
Percent of
Households Shifted
that Could Afford
Baseline
1
$30
$65
$90,412
$18
(6.4)
-0.04%
2
$70
$150
$90,436
$43
(14.9)
-0.09%
3
$0
$0
$90,393
$0
0.0
0.00%
4
$44
$95
$90,421
$27
(9.4)
-0.06%
Source: EPA estimates based on the methodologies presented in Chapter Four.
5.6.2 Analysis of the National Housing Market
5.6.2.1 Overview of Methodology and Assumptions Used in the National Housing Model
In this analysis, EPA uses a national partial equilibrium model of single-family housing. Partial
equilibrium models use information on estimated elasticities of market supply and demand to estimate the
impact of incremental costs on the supply curve and, thus, on prices and quantities of construction
products. Additional costs of compliance generally shift the supply curve up. This shift typically drives
changes in prices (prices rise) and quantities (quantities fall). This model calculates changes in housing
prices and quantities of single-family housing (see Section 5.6.2). The detailed methodology for this
National Housing Market Model was presented Chapter Four, Section 4.3.2.2.
5.6.2.2 Estimates of Impacts on the National Housing Market
Table 5-14 shows the results of EPA's analysis using the National Housing Market Model. The
table shows the estimated changes in median single-family home prices as a result of the options
considered. The changes in costs range from $0 to $70. The market model recognizes that market
conditions control how much of these costs can be passed through to consumers. Thus, the price increase
is somewhat smaller than the related cost increase, reflecting the fact that some costs would be borne by
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the builder-developer. The largest increase in price reduces the quantity that can be sold by about 0.01
percent. The total loss in output to the construction industry ranges from $0 to $49.6 million. See also
DCN 45026 in the Rulemaking Record.
Table 5-14. Single-Family Residential—Changes in Price and Quantity From the Baseline (All
Dollar Values Are in Constant, Pre-tax, 2000 Dollars)
Change in
Price
Quantity
Quantity
Loss of
Cost
New Price
Change
Change
Change
Output
Option
($/Unit)
($/Unit)
($/Unit)
(Units)
(Percent)
($ Million)
1
$30
$316,126
$27
(67)
0.00%
$(21.3)
2
$70
$316,162
$62
(157)
-0.01%
$(49.6)
3
$0
$316,099
$0
0
0.00%
$0
4
$44
$316,139
$39
(99)
-0.01%
$(31.2)
Source: EPA estimates based on the methodologies presented in Chapter Four.
5.6.3 Analysis of Regional Markets
5.6.3.1 Overview of Methodologies and Assumptions Used in the Regional Market Modeling
Module
EPA analyzes regional markets for the four major sectors (single-family, multifamily,
commercial, and industrial), again using partial equilibrium market models within the C&D/PEqMMS.
These models, known collectively as the Regional Market Modeling Module, use state-specific costs per
acre as discussed in Chapter Four, Section 4.3.2.3. The outputs of these regional analyses are somewhat
different among the sectors. EPA's focus on analyzing the single-family sector is to provide another
measure of housing affordability, since price and quantity effects can also be measured at the regional
level, as in Section 5.6.2. However, EPA is analyzing the multifamily, commercial, and industrial sectors
with the Regional Market Modeling Module to calculate the national-level changes in price and quantity
due to the effect of regulatory cost increases in these sectors and to determine regional-level net economic
impacts (discussed in Section 5.7). Chapter Four, Section 4.3.2.3 discusses the methodologies used to
perform these analyses in detail.
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EPA's regional analysis of the single-family housing market looks at affordabilty using a
Housing Opportunity Index (HOI) approach. The HOI is an alternative measure of housing affordability.
It measures the percentage of households in a region that can afford the median-priced house in that
region. EPA uses a rough estimate of HOI, which is termed RHOI as explained in Chapter Four. EPA
estimated the change in RHOI from its baseline value for 215 regional housing markets using the price
changes predicted in each of those markets by the partial equilibrium models. A change downward in the
RHOI percentage indicates the number of households that can no longer afford the median-priced home.
EPA's regional analysis of the multifamily, commercial, and industrial construction markets also
use partial equilibrium models, but fewer regions could be analyzed in the commercial and industrial
C&D sectors. The regional results are aggregated to estimate a national average effect on prices and
quantities in these markets for input to the Net Economic Impact Model (see Section 5.7).
5.6.3.2 Estimates of Regional Market Impacts
5.6.3.2.1 Single-Family Housing Market
Table 5-15 summarizes the results of the analysis of the single-family housing market in terms of
the average change in RHOI calculated across each Census Bureau division. The change in RHOI value
from baseline can be seen by comparing Option 1, 2, and 4 RHOI values to those for Option 3. Since the
RHOI encompasses both existing and new housing, the results show the net effect for the entire housing
market. The value of the RHOI varies considerably by region. In the Pacific region, high real estate prices
result in only one third of households having sufficient income to purchase the median-priced home. In
the central regions, however, three-quarters of households can afford the median-priced home.
The regulatory options have little effect on regional RHOI. Table 5-16 shows the percentage
change in RHOI by Census division. Option 1 changes RHOI by a maximum of 0.04 percent in all
regions. Option 2 changes RHOI by a maximum of 0.23 percent. Option 4 changes RHOI by a maximum
of 0.19 percent. The largest changes occur in the East North Central region. These changes are much
smaller in scale than annual changes that result from normal shifts in real estate market conditions and
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demography of the market areas. More detailed results can be seen in DCN 45026, in the Rulemaking
Record.
Table 5-15. Single-Family Residential Average RHOI by Census Division
Option
Census Division
1
New
England
2
Middle
Atlantic
3
East
North
Central
4
West
North
Central
5
South
Atlantic
6
East
South
Central
7
West
South
Central
8
Mountain
9
Pacific
1
54.21
62.33
72.64
78.79
70.28
69.67
64.70
44.55
32.61
2
54.15
62.27
72.50
78.72
70.24
69.65
64.68
44.51
32.58
3
54.24
62.37
72.67
78.82
70.31
69.70
64.73
44.58
32.63
4
54.18
62.30
72.53
78.75
70.29
69.68
64.72
44.55
32.59
RHOI indicates the percentage of households in each region that can afford the median-priced house.
Source: EPA estimates based on the methodologies presented in Chapter Four.
Table 5-16. Single-Family Residential—Percentage Change in RHOI by Census Division
Option
Census Division
1
New
England
2
Middle
Atlantic
3
East
North
Central
4
West
North
Central
5
South
Atlantic
6
East
South
Central
7
West
South
Central
8
Mountain
9
Pacific
1
-0.05%
-0.06%
-0.04%
-0.04%
-0.05%
-0.05%
-0.05%
-0.07%
-0.06%
2
-0.17%
-0.17%
-0.23%
-0.13%
-0.10%
-0.08%
-0.08%
-0.16%
-0.16%
3
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
4
-0.11%
-0.12%
-0.19%
-0.10%
-0.03%
-0.03%
-0.03%
-0.05%
-0.11%
RHOI indicates the percentage of households in each region that can afford the median-priced house.
Source: EPA estimates based on the methodologies presented in Chapter Four.
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5.6.3.2.2
Multifamily Housing Markets
Table 5-17 shows the estimated changes in median price of a unit in a multifamily building from
the options considered. The changes in costs range from $0 to $77 per unit. Multifamily housing disturbs
a smaller area per unit, so any ESC-related costs are spread over more units. The market model suggests a
higher share of compliance costs in multifamily housing would be passed through to consumers compared
to single-family homes, so price changes are closer to the actual change in builder costs. The price
changes passed through to consumers range from $0 to $72 per unit.
Table 5-17. Multifamily Residential—Changes in Price and Quantity From the Baseline (All
Dollar Values Are in Constant, Pre-tax, 2000 Dollars)
Option
Change in
Cost
($/Unit)
New Price
($1,000/
Unit)
Price
Change
($/Unit)
Quantity
Change
(Units)
Quantity
Change
(Percent)
Loss of
Output
($ Million)
1
$21
$132.54
$19
(34)
-0.01%
($4.5)
2
$77
$132.60
$72
(115)
-0.04%
($15.0)
3
$0
$132.53
$0
0
0.00%
$0.0
4
$38
$132.56
$35
(54)
-0.02%
($7.1)
Source: EPA estimates based on the methodologies presented in Chapter Four.
5.6.3.2.3 Commercial Space Markets
Rental prices for commercial space are typically quoted in dollars per square foot per year.
Table 5-18 shows the estimated changes in median rental rate of a square foot of commercial space from
the options considered. The changes in costs range from $0 to $0.06 per square foot. Tenants of
commercial space are considerably more price sensitive than residential buyers, so less of the change in
costs can be passed through to tenants. The change in average price per square foot reflects this
absorption of compliance costs by builders and building owners.
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Price changes range from $0 to $0.05 per square foot. Quantity reductions are estimated to reach -
0.16 percent for the most costly option. The total loss in output to the construction industry ranges from
$0 to $262.2 million.
Table 5-18. Commercial—Changes in Price and Quantity From the Baseline (All Dollar Values
Are in Constant, Pre-tax, 2000 Dollars)
Option
Change in Cost
($/Sq. Ft.)
New Price
($/Sq. Ft.)
Price
Change
($/Sq. Ft.)
Quantity
Change
(Units)
Quantity
Change
(Percent)
Loss of
Output
($ Million)
1
$0.01
$14.68
$0.01
(119)
-0.03%
$62.5
2
$0.06
$14.72
$0.05
(509)
-0.16%
($262.2)
3
$0.00
$14.66
$0.00
0
0.00%
$0.0
4
$0.04
$14.70
$0.04
(339)
-0.11%
($174.8)
Source: EPA estimates based on the methodologies presented in Chapter Four.
5.6.3.2.4 Industrial Space Markets
Only 12,100 industrial projects are expected to start in the base year. Rental prices for industrial
space are typically quoted in dollars per square foot per year. Table 5-19 shows the estimated changes in
median rental rate of a square foot of industrial/warehouse space from the options considered. The
changes in costs range from $0 to $0.08 per square foot. Buyers of industrial space are considerably more
price sensitive than homeowners, so less of the change in costs can be passed through to the end users.
The change in average price per square foot reflects this absorption of compliance costs by builders and
developers.
Price changes range from $0 to $0.07 per square foot. Quantity is reduced by about 1 percent for
the most costly option, albeit on a small number of projects in the baseline. The total loss in output to the
industrial construction industry ranges from $0 to $24.9 million.
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Table 5-19. Industrial—Changes in Price and Quantity From the Baseline (All Dollar Values
Are in Constant, Pre-tax, 2000 Dollars)
Option
Change in
Cost ($/Sq.
Ft.)
New Price
($/Sq. Ft.)
Price
Change
($/Sq. Ft.)
Quantity
Change
(Units)
Quantity
Change
(Percent)
Loss of
Output
($ Million)
1
$0.01
$5.18
$0.01
(27)
-0.19%
($4.7)
2
$0.08
$5.24
$0.07
(144)
-1.01%
($24.9)
3
$0.00
$5.16
$0.00
0
0.00%
$0.0
4
$0.06
$5.22
$0.05
(107)
-0.73%
($18.6)
Source: EPA estimates based on the methodologies presented in Chapter Four.
5.7 ANALYSIS OF NET ECONOMIC IMPACTS
EPA's analysis of net economic impacts uses the last module of the C&D/PEqMMS, the Net
Economic Impact Model. The analysis focuses on three areas of potential impact: (1) impacts on U.S.
economic output and employment (Section 5.7.1); (2) impacts on measures of consumer and producer
welfare (Section 5.7.2); and (3) impacts on regions and communities (Section 5.7.3). Additionally, EPA
qualitatively analyzes impacts on international trade outside the C&D/PEqMMS (Section 5.7.4). With
the exception of international trade, all of these impacts are calculated within the framework of the partial
equilibrium market models described in Section 5.6 previously. Net impacts on output and employment
stemming from the market for single-family homes are calculated using the National Housing Model
discussed in Section 5.6.2. Output and employment impacts for the multifamily, commercial, and
industrial sectors are derived from the Regional Market Modeling Module. The analysis of impacts on
regions and communities use the outputs of the regional market models to develop state-specific estimates
of impacts on output and employment. The spreadsheets used to calculate these net economic impacts are
available in the Rulemaking Record (DCNs 45025, 45027, and 45038).
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5.7.1 Impacts on Output and Employment
5.7.1.1 Overview of Meth odology an d Assumptions
EPA uses the results of the National Housing Model for the single-family sector and the Regional
Market Modeling Module for the multifamily, commercial and industrial sectors. These models provide
the change in price and quantity expected on average in each market. The changes in price and quantity
are used to compute the direct output (revenue) changes in the industry sectors themselves. These output
changes have a ripple effect in the rest of the economy, which can be measured using input-output
multipliers developed by the Bureau of Economic Analysis (U.S. Department of Commerce, 1996).
These multipliers also can be used to estimate the impacts of output changes in the industry to calculate
employment changes both within the industry and in the rest of the U.S. economy.
Compliance costs generate economic gains as well. Economic gains are derived from the
economic activity of installing and maintaining ESCs, as well as from inspecting and certifying sites. In
this analysis, EPA calculates the losses to industry and the U.S. economy and the gains of output and
employment separately, then calculates the net gains or losses in the U.S. economy as a whole.
Additional details about this methodology can be seen in Chapter Four, Section 4.3.3.
5.7.1.2 Estimates of Output and Employment Losses
As discussed previously, additional compliance costs reduce the output of the construction
industry as the increased price reduces sales. The estimate of this effect is shown in the "Loss of Output"
column of Table 5-20. Most of the losses are in the large, single-family residential and commercial
construction sectors. These losses are offset, however, by increases in output and employment in those
industries associated with compliance, i.e., design, installation, and inspection of ESCs. The estimate of
the amount of new work generated in these activities is shown in the "Offset from Compliance Work"
column. The next two columns show the changes in jobs related to the loss in construction spending and
(offsetting) increase in regulatory compliance spending. Under both options, the need for labor associated
with compliance activities and the subsequent direct and indirect effects of that additional labor adds
more jobs than the loss of output takes away, resulting in a positive net employment change.
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Table 5-20. Changes in Output and Total Employment From the Baseline (All Dollar Values
Are in Constant, Pre-tax, 2000 Dollars)
Option
Loss of
Output
($ Million)
Stimulus
from
Added
Work
($ Million)
Change in
Employment
from Lost
Output
(Jobs)
Change in
Employment
from
Stimulus
(Jobs)
Net Change in
Employment
From
Construction
Impacts
(Jobs)
Change in
Employment
From
Construction
Impacts
(Jobs)
Net Change
in Total
Employment
(Jobs)
Single-Family Residential
1
($21.3)
$47.9
(791)
1,781
989
(1,162)
(173)
2
($49.6)
$111.6
(1,844)
4,148
2,304
(2,707)
(403)
3
$0.0
$0.0
0
0
0
0
0
4
($31.2)
$70.3
(1,160)
2,611
1,450
(1,704)
(254)
Multifamily Residential
1
($4.5)
$7.2
(169)
267
98
(196)
(98)
2
($15.0)
$24.0
(558)
891
334
(655)
(321)
3
$0.0
$0.0
0
0
0
0
0
4
($7.1)
$11.2
(265)
418
153
(307)
(154)
Commercial
1
($62.5)
$164.2
(2,322)
6,102
3,780
(4,055)
(275)
2
($262.2)
$661.0
(9,743)
24,560
14,817
(16,265)
(1,448)
3
$0.0
$0.0
0
0
0
0
0
4
($174.8)
($417.4)
(6,495)
15,509
9,014
(10,209)
(1,194)
Industrial
1
($4.7)
$7.3
(175)
273
98
(169)
(71)
2
($24.9)
$39.0
(926)
1,448
522
(901)
(379)
3
$0.0
$0.0
0
0
0
0
0
4
($18.6)
$29.1
(692)
1,080
388
(672)
(284)
Total
1
($93.0)
$226.7
(3,457)
8,422
4,965
(5,581)
(616)
2
($351.8)
$835.5
(13,070)
31,047
17,976
(20,528)
(2,552)
3
$0.0
$0.0
0
0
0
0
0
4
($231.8)
$527.9
(8,612)
19,618
11,006
(12,892)
(1,886)
Source: EPA estimates based on the methodologies presented in Chapter Four.
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In the single-family sector under Option 1, for example, there is a loss of $21.3 million of output but an
offsetting stimulus of $48 million. The loss represents 791 jobs, but the offset generates 1,781 jobs; the
net result is the generation of 989 more jobs. Note that these job estimates apply to the entire economy,
not just the construction sectors. They represent all of the impacts that result as changes in the
construction industry ripple through other sectors.
The stimulus to the construction industry comes at the expense of consumer spending, as home
buyers and other consumers devote more of their income to housing. EPA assumes that this loss of
consumer surplus takes the form of reduced spending for other products, though it might also take the
form of reduced amenities in housing construction. Removing this spending from the national economy
reduces the employment that arises in response to consumer spending. The "Change in Employment From
Consumer Spending" column shows this reduction in jobs, which offsets the stimulus to construction.
When this effect is factored in, the net change in total employment is negative.
Total employment losses range from 0 to 2,552 jobs. These estimates do not consider how long
individuals may be out of work, nor do they consider individuals' alternative opportunities. Because of
this, such input-output analysis results are usually considered an over-estimate of the hardship initiated by
the change to the economy.
5.7.2 Impacts on Welfare Measures
5.7.2.1 Overview of Methodology and Assumptions
As discussed in Chapter Four, Section 4.3.3, the incremental regulatory options (Options 1, 2 and
4) shift the supply curves for new construction in each sector. This shift alters the balance between
consumers and producers. Each group contributes to the costs of complying with the regulation.
Producers lose as their margin falls. Consumers lose in that they must allocate more of their resources to
housing rather than other things that give them pleasure. Much of the loss in consumer welfare is shifted
to producers, but generally both consumers and producers lose some surplus that is not gained elsewhere
in the economy. Loss that is not compensated by gain elsewhere in the economy is termed "deadweight"
loss. The consumer, producer, and deadweight losses are calculated using the same market models used
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to calculate output losses. These calculations depend on the interactions between the supply and demand
curves in each model and the magnitude of the shift in the supply curve, as discussed in more detail in
Chapter Four, Section 4.3.3.
5.7.2.2 Estimates of Impacts on Welfare Measures
As Table 5-21 indicates, consumers may lose from $0 to $752.4 million, depending on the option
selected. Producers lose from $0 to $87.8 million. Almost all of this loss is shifted from consumers and
construction firm owners to construction firms to pay the costs of complying with the regulation. As
shown in the last section, the net effect on construction may be a stimulus. However, a small portion is
utterly lost to society. This portion, the "deadweight loss," ranges from $0 to $965,000. The calculations
of these losses can be seen in DCN 45026 in the Rulemaking Record.
Table 5-21. Annual Changes in Social Welfare Measures—All Sectors Combined (All Dollar
Values Are in Constant, Pre-tax, 2000 Dollars)
Option
Total Deadweight Loss
($ Million)
Total Consumer
Surplus Loss
($ Million)
Total Producer Surplus
Loss
($ Million)
1
$0,044
$204.6
$23.3
2
$0,965
$752.4
$87.8
3
$0,000
$0.0
$0.0
4
$0,647
$472.5
$57.9
Source: EPA estimates based on the methodologies presented in Chapter Four.
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5.7.3 Impacts on Regions and Communities
5.7.3.1 Overview of Methodology and Assumptions Used
The multifamily housing and nonresidential market models estimate impacts on output and
employment at the state level based on information about local real estate markets. The single-family
housing market model estimates market effects at the Metropolitan Statistical Area (MSA) level, which
EPA then aggregates to the state level. The distribution of these impacts can be used to identify which
states might be more or less affected by the options considered for the Final Action. As before at the
national level, these impacts are measured in terms of output and employment gains and losses. Section
4.3.2.3 discusses this methodology in more detail.
5.7.3.2 Estimates of Impacts on Regions and Communities
Table 5-22 shows the loss in output to the construction industry, by state, as a result of
compliance with Option 2, the most expensive option. Loss of output largely follows the expected pattern
of population and growth. Several states show zero loss for some categories because there is so little
activity in that state that the effect could not be measured. Under Option 2, states are either affected by
the inspection and certification provisions (I&C) or both the I&C and CGP provisions. Those states with
very small impacts most likely have regulations equivalent to the CGP provisions and, therefore, show no
impacts under Option 4. See DCN 45026 in the Rulemaking Record for the detailed results of all options.
Table 5-23 provides a similar state-by-state breakdown of the net change in employment as a
result of compliance with Option 2. In several states, multifamily housing, commercial, and industrial
stimulus effects are greater than the losses, and the regulation causes a small net positive change in
employment within those categories. Again, results for Options 1 and 4 are lower and distributed
differently because of state equivalency. DCN 45024 in the Rulemaking Record provides the results for
all options.
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Table 5-22. Changes in Output to the Construction Industry by State and Use Category Under
Option 2 ($ Mil
ions) (All Dol
ar Values Are in Constant, Pre-tax, 2000 Dollars)
State
Single-Family
Multifamily
Commercial
Industrial
Total
Alabama
$(0.3)
$(0.1)
$(1.6)
$(0.2)
$(2.2)
Alaska
$0.0
$0.0
$0.0
$0.0
$0.0
Arizona
$(0.9)
$(0.2)
$(3.6)
$(0.1)
$(5.0)
Arkansas
$(0.1)
$0.0
$(0.5)
$(0.1)
$(0.7)
California
$(5.4)
$(1.7)
$(14.5)
$(1.3)
$(23.0)
Colorado
$(4.2)
$(1.0)
$(4.4)
$(0.7)
$(10.2)
Connecticut
$(1.5)
$0.0
$(1.2)
$(0.1)
$(2.9)
Delaware
$(0.1)
$0.0
$(0.9)
$0.0
$(1.1)
District of Columbia
$0.0
$0.0
$0.0
$0.0
$0.0
Florida
$(1.9)
$(0.8)
$(25.8)
$(0.6)
$(29.1)
Georgia
$(3.8)
$(0.8)
$(13.7)
$(1.8)
$(20.2)
Hawaii
$0.0
$0.0
$0.0
$0.0
$0.0
Idaho
$0.0
$0.0
$(0.6)
$(0.1)
$(0.7)
Illinois
$(6.4)
$(1.1)
$(21.5)
$(1.9)
$(30.9)
Indiana
$(3.6)
$(0.5)
$(16.0)
$(1.6)
$(21.7)
Iowa
$(0.1)
$0.0
$(1.2)
$(0.6)
$(2.0)
Kansas
$(0.1)
$0.0
$(1.7)
$(0.4)
$(2.2)
Kentucky
$(0.3)
$(0.1)
$(2.4)
$(0.6)
$(3.4)
Louisiana
$(0.3)
$0.0
$(1.4)
$(0.1)
$(1.9)
Maine
$0.0
$0.0
$(0.4)
$(0.1)
$(0.5)
Maryland
$(1.9)
$(0.2)
$(6.2)
$(0.3)
$(8.6)
Massachusetts
$(0.5)
$(0.1)
$(1.5)
$(0.1)
$(2.2)
Michigan
$(5.7)
$(0.6)
$(23.6)
$(1.3)
$(31.1)
Minnesota
$(0.8)
$(0.2)
$(4.6)
$(0.7)
$(6.4)
Mississippi
$(0.2)
$(0.1)
$(1.4)
$(0.2)
$(1.8)
Missouri
$(3.6)
$(0.6)
$(6.9)
$(0.7)
$(11.9)
Montana
$0.0
$0.0
$(0.5)
$(0.1)
$(0.5)
Nebraska
$(0.7)
$(0.2)
$(2.5)
$(0.2)
$(3.5)
Nevada
$0.0
$(0.1)
$(0.6)
$(0.1)
$(0.8)
New Hampshire
$(0.1)
$0.0
$(0.3)
$(0.1)
$(0.5)
New Jersey
$(4.1)
$(0.8)
$(5.7)
$(0.1)
$(10.7)
New Mexico
$(0.1)
$0.0
$(0.4)
$0.0
$(0.6)
New York
$(2.3)
$(1.6)
$(22.4)
$(0.4)
$(26.7)
North Carolina
$(1.1)
$(0.4)
$(6.0)
$(1.1)
$(8.6)
North Dakota
$(0.1)
$0.0
$(0.7)
$(0.2)
$(1.1)
Ohio
$(6.9)
$(1.0)
$(11.6)
$(1.4)
$(20.8)
Oklahoma
$(0.2)
$0.0
$(3.1)
$(0.1)
$(3.6)
Oregon
$(1.6)
$(0.3)
$(2.6)
$(1.0)
$(5.6)
Pennsylvania
$(1.0)
$(0.2)
$(11.2)
$(1.1)
$(13.6)
Rhode Island
$(0.8)
$(0.1)
$(0.5)
$(0.3)
$(1.6)
South Carolina
$(0.3)
$(0.1)
$(3.6)
$(0.3)
$(4.3)
South Dakota
$0.0
$0.0
$(0.8)
$(0.1)
$(1.0)
Tennessee
$(0.5)
$(0.2)
$(3.8)
$(0.6)
$(5.0)
Texas
$(2.4)
$(0.6)
$(2.3)
$(0.8)
$(6.1)
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Table 5-22. Changes in Output to the Construction Industry by State and Use Category Under
Option 2 ($ Mil
ions) (All Dol
ar Values Are in Constant, Pre-tax, 2000 Dollars)
State
Single-Family
Multifamily
Commercial
Industrial
Total
Utah
$(0.1)
$0.0
$(1.4)
$(0.3)
$(1.8)
Vermont
$(0.1)
$0.0
$(0.4)
$(0.1)
$(0.7)
Virginia
$(0.3)
$0.0
$(9.7)
$(0.7)
$(10.7)
Washington
$(2.5)
$(0.8)
$(1.8)
$(0.6)
$(5.7)
West Virginia
$0.0
$0.0
$(1.2)
$(0.1)
$(1.3)
Wisconsin
$(2.1)
$(0.6)
$(12.6)
$(1.5)
$(16.8)
Wyoming
$0.0
$0.0
$(0.4)
$0.0
$(0.4)
United States Total
$(69.3)
$(15.0)
$(262.2)
$(24.9)
$(371.5)
Source: EPA estimates based on the methodologies presented in Chapter Four.
5.7.4 Impacts on International Trade
As discussed in depth in Chapter Four, Section 4.3.3, EPA has determined that impacts on
international trade will be minimal.
5.8 IMPACTS ON GOVERNMENTAL UNITS
As Section 4.8 discusses, EPA estimates that the options considered can impose some costs on
governmental units involved in "codifying" the construction general permit. This section examines the
costs imposed on governmental units associated with Options 2 and 4. The costs were derived at
proposal. EPA has not re-evaluated these costs, but believes, given the level of equivalency found in
most state regulations, that estimates from proposal are conservatively high. Option 4 costs are assumed
to be the same as Option 2 costs.
5.8.1 Construction Program Administration
EPA has analyzed the costs to governments under the assumption that the majority of
construction-related regulatory costs would be associated with processing general permits. As noted
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Table 5-23. Net Change in Total Employment by State and Use Category (Jobs) Unc
State
Single-
Family
Multifamily
Commercial
Industrial
Total
Alabama
(1)
(1)
(10)
(4)
(15)
Alaska
0
0
0
0
0
Arizona
0
(5)
(22)
(2)
(28)
Arkansas
0
0
4
(2)
2
California
(18)
(38)
168
(12)
99
Colorado
(31)
(21)
(26)
(6)
(84)
Connecticut
(14)
(1)
86
0
71
Delaware
0
(1)
(6)
0
(7)
District of Columbia
0
0
0
0
0
Florida
0
(14)
(155)
(10)
(179)
Georgia
(8)
(12)
(84)
(33)
(136)
Hawaii
0
0
0
0
0
Idaho
0
0
2
(1)
1
Illinois
(53)
(25)
(338)
(31)
(447)
Indiana
(29)
(10)
(210)
(32)
(281)
Iowa
0
(1)
(7)
(14)
(22)
Kansas
0
0
(10)
(7)
(18)
Kentucky
(1)
(1)
(15)
(9)
(26)
Louisiana
0
(1)
11
(2)
9
Maine
0
0
30
0
30
Maryland
(16)
(4)
(38)
(5)
(63)
Massachusetts
0
(3)
104
0
101
Michigan
(49)
(15)
(289)
(10)
(363)
Minnesota
(2)
(5)
(28)
(13)
(48)
Mississippi
0
(1)
(8)
(2)
(12)
Missouri
(28)
(12)
(42)
(12)
(95)
Montana
0
0
2
(1)
1
Nebraska
(5)
(3)
(15)
(3)
(26)
Nevada
0
1
44
(2)
43
New Hampshire
0
0
21
0
21
New Jersey
(38)
(18)
(89)
1
(144)
New Mexico
0
0
2
0
2
New York
0
(39)
(236)
(2)
(277)
North Carolina
(2)
(7)
(36)
(20)
(66)
North Dakota
0
(1)
(5)
(4)
(10)
Ohio
(59)
(23)
(151)
(24)
(257)
Oklahoma
0
(1)
(49)
(1)
(51)
Oregon
(8)
(5)
39
(15)
11
Pennsylvania
(1)
(4)
(68)
(22)
(94)
Rhode Island
(8)
(2)
37
(1)
27
South Carolina
0
(1)
(22)
(5)
(28)
South Dakota
0
0
(5)
(2)
(7)
Tennessee
0
(3)
(23)
(8)
(34)
Texas
0
(14)
162
(14)
134
er
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Table 5-23. Net Change in Total Employment by State and Use Category (Jobs) Unc
State
Single-
Family
Multifamily
Commercial
Industrial
Total
Utah
0
0
(8)
(3)
(12)
Vermont
(1)
0
29
0
28
Virginia
0
(1)
(152)
(13)
(165)
Washington
(16)
(15)
127
(6)
90
West Virginia
0
0
(7)
(2)
(9)
Wisconsin
(15)
(13)
(165)
(25)
(217)
Wyoming
0
0
2
0
1
United States Total
(403)
(321)
(1,448)
(379)
(2,552)
er Option 2
Source: EPA estimates based on the methodologies presented in Chapter Four.
previously, EPA assumes that the majority of NPDES Phase I and Phase II stormwater permit programs
are fully implemented, and that any new regulatory requirements would be superimposed upon these
programs.
Based on the assumption that all states would change their stormwater programs to include
certification of sedimentation basins and other aspects of the incremental regulatory options, EPA
estimated the annual costs of establishing such a program. These costs are presented in Table 5-24. EPA
estimates that states experience $0.24 million in costs per year to stay current with federal guidance, state
guidance, and evolving industry practice (U.S. EPA, 2002).
Table 5-24. Costs To Establish Construction Programs (All Dollar Values are in Constant, Pre-
Tax, 2000 Dollars)
Element
Value
Units
Labor hours to review EPA regulation and
modify state practices
200
Hours/Y ear
Labor cost
$24.36
$/Hour/State
State Cost per year
$4,871
$/Y ear/State
Number of States
50
States
Total
$243,551
$/Ycar
Source: U.S. EPA, 2002.
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In evaluating the annual costs, EPA assumed that the current trend—states taking the lead in
implementing the regulation of construction activities—will continue in the future. EPA elected not to
evaluate how to distribute its total estimated implementation cost between state and municipal agencies,
and instead has attributed all costs to states.
5.8.2 Government Construction Costs
Government entities commission nearly a quarter of the value of construction put in place
(Census, 2000). Government projects may need to comply with one of the incremental regulatory options,
if selected for the Final Action. In that case, their costs would increase, just as costs for private projects
would. Roughly one-half of government projects are maintenance or reconstruction of existing structures
that do not entail new ground disturbance. EPA estimates that approximately 24.7 percent of total impacts
would fall on government projects resulting in a $72.4 million additional cost to government entities
under Option 1, a $137.3 million additional cost under Option 2, or a $88.9 million additional cost to
government entities under Option 4.6 This effect is discussed in detail in the Unfunded Mandates Reform
Act (UMRA) analysis in Chapter Nine.
5.9 OTHER IMPACTS
This section addresses Executive Order (EO) 12866, which directs federal agencies to assess the
costs and benefits of each significant rule they propose or promulgate, as well as issues of environmental
justice and children's health. Section 5.9.1 describes the administrative requirements of EO 12866.
Sections 5.9.2 and 5.9.3 describe EPA's analysis of environmental justice and children's health issues for
the options considered. Another piece of legislation—the Unfunded Mandates Reform Act, or
UMRA—also has requirements relevant to EPA's plans. Chapter Nine addresses UMRA.
6 Additional cost to government entities under the ESC options includes costs potentially incurred
by Federal, State, and local government entities.
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Much of the information provided in this section is summarized from other documents that
support the Final Action, as well as other sections of this report.
5.9.1 Requirements of Executive Order 12866
Under EO 12866 (58 FR 51735, October 4, 1993), the Agency is to determine whether a
regulatory action is "significant" and therefore subject to OMB review and the directives of the EO. The
Order defines a "significant regulatory action" as one that is likely to result in a rule that may:
• Have an annual effect on the economy of $100 million or more or adversely affect in a
material way the economy, a sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or state, local, or tribal governments or
communities;
Create a serious inconsistency or otherwise interfere with an action taken or planned by
another agency;
Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs
or the rights and obligations of recipients thereof; or
Raise novel legal or policy issues arising out of legal mandates, the President's priorities,
or the principles set forth in the Executive Order.
EPA has determined that if Options 1, 2, or 4 are chosen for the Final Action, they will result in a
"significant regulatory action" under the terms of EO 12866, because the total costs of these options are
estimated to exceed $100 million annually. As such, this action was submitted to OMB before proposal.
Among the EO are that the Agency perform an analysis comparing the benefits of the regulation
to the costs that the regulation imposes, that the Agency analyze alternative approaches for the Final
Action, and that the reason for the Final Action be identified. Wherever possible, the costs and benefits of
the Final Action are to be expressed in monetary terms. Chapter Eight of this EA presents the estimated
social costs, pollutant reductions, and monetary benefits of the Final Action. Section 5.8 addresses the
impacts of the options considered on governmental units. An in-depth profile of the potentially affected
industry sectors is presented in Chapter Two of this report.
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Executive Order 12866 directs the Agency to identify the reason for the incremental regulatory
options being considered. The reasons for considering Options 1, 2, and 4 are stated throughout this
report (Chapters One and Six).
Both UMRA and EO 12866 require the statutory authority for the rule to be cited. A detailed
discussion of the objectives and legal basis for the Final Action is presented in the preamble. A
discussion of the UMRA is presented in Chapter Nine of this report.
5.9.2 Environmental Justice
According to EO 12898, Federal Actions To Address Environmental Justice in Minority
Populations and Low-Income Populations, Federal agencies are to address potential environmental justice
issues that may be triggered by the options considered. Based on guidance in EPA's Guidelines for
Preparing Economic Analyses, the potential effects of the options considered on minority and low-
income populations have been considered (U.S. EPA, 2000). EPA has determined that the Final Action
will not have a disproportionately large effect on minority or low-income populations, nor would it have
disproportionately high human health or environmental effects, regardless of option selected. Thus, no
further analysis on environmental justice issues has been conducted for the Final Action.
5.9.3 Children's Health
Pursuant to EO 13045, Protection of Children From Environmental Health Risks and Safety
Risks, EPA has considered whether this Final Action would have any significant effects on children's
health or safety (U.S. EPA, 2000). EPA has determined, based on the information provided throughout
this report, that the Final Action will not have any significant effects on children's health or safety,
regardless of option selected, and no further analysis has been conducted for this Final Action.
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5.10 REFERENCES
Tetra Tech. 2002. Personal communication from J. Swanson of Tetra Tech, Inc., to J. Cantin of ERG, Inc.
January 29.
U.S. Census Bureau 2000. 1997 Economic Census: Construction: Subject Series. January.
U.S. Department of Commerce. 1996. Bureau of Economic Analysis. Regional Input/Output Modeling
System (RIMS II). Table A-24 - Total Multiplier, by Industry Aggregation for Output, Earnings,
and Employment. Washington, DC: U.S. Department of Commerce.
U.S. EPA. 2000. Guidelines for Preparing Economic Analyses. Washington, DC: U.S.
Environmental Protection Agency, EPA 240-R-00-003, September.
U.S. EPA 2002. Development Document for the Proposed Effluent Guidelines and Standards for the
Construction and Development Point Source Category. Washington, DC: U.S. Environmental
Protection Agency.
U.S. EPA. 2002a. Economic Analysis of Proposed Effluent Guidelines and Standards for the
Construction and Development Category. Washington, DC: U.S. Environmental Protection
Agency, EPA-821-R-02-008, May.
U.S. EPA. 2004. Development Document for Final Action for Effluent Guidelines and Standards for the
Construction and Development Category. Washington, DC: U.S. Environmental Protection
Agency. EPA-821-B-04-001.
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CHAPTER SIX
FINAL REGULATORY FLEXIBILITY ANALYSIS
6.1 INTRODUCTION TO THE FINAL REGULATORY FLEXIBILITY ANALYSIS
This chapter considers the effects of the regulatory options considered by EPA for the Final
Action on small entities in the C&D industry. This analysis is conducted in accordance with the
Regulatory Flexibility Act (RFA, 5 U.S.C. et seq., Public Law 96-354) as amended by the Small Business
Regulatory Enforcement Fairness Act of 1996 (SBREFA). The purpose of the RFA is to establish as a
principle of regulation that agencies should tailor regulatory and informational requirements to the size of
entities, consistent with the objectives of a particular regulation and applicable statutes. The RFA
generally provides for an agency to prepare a final regulatory flexibility analysis (FRFA) 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 impact on a substantial
number of small entities" (U.S. EPA, 1999). Small entities include small businesses, small organizations
as defined by SBA, and governmental jurisdictions with populations of less than 50,000.
6.2 SMALL BUSINESS ANALYSIS COMPONENTS
To analyze small business impacts, EPA has undertaken the components of an analysis in
accordance with the RFA, which provides that a FRFA is to contain:
State the need for and objectives of the rule.
Summarize the significant issues raised by public comments on the initial regulatory
flexibility analysis (IRFA) and the Agency's assessment of those issues and describe any
changes in the rule resulting from pubic comment.
Describe the steps the Agency has used to minimize the significant economic impact on
small entities consistent with the stated objectives of the applicable statutes, including a
statement of the factual, policy, and legal reasons for selecting the alternative adopted in
6-1
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the final rule and why each one of the other significant regulatory
alternatives to the rule was rejected.
Describe/estimate the number of small entities to which the rule will apply or explain
why no such estimate is available.
Describe the projected reporting, recordkeeping, and other compliance requirements of
the rule, including an estimate of the classes of small entities that will be subject to the
requirements of the rule.
EPA presents the impacts of the four options considered on small businesses. These impacts are
discussed in Section 6.3.
6.2.1 Need for and Objectives of the Rule
EPA maintains the authority to promulgate effluent guidelines and standards under sections 301,
304, 306, 307, 308, and 501 of the Clean Water Act (CWA), and 33 U.S.C. sections 1311, 1314, 1316,
1317, 1318, and 1361. Under these sections, EPA is authorized to set standards for controlling discharge
of pollutants for the C&D industry. The decision to regulate or not to regulate is considered pursuant to a
Consent Decree in NRDC et al. V. Reilly (D.D.C. No. 89-2980, January 31, 1992), and the decision is
consistent with EPA's latest Effluent Guidelines Plan under section 304(m) of the Clean Water Act (see
FRL-7268-5, 67(166):55012-55014).
The objective of the CWA is to "restore and maintain the chemical, physical, and biological
integrity of the Nation's waters." To assist in achieving this objective, EPA issues effluent limitations
guidelines, pretreatment standards, and NSPS for industrial dischargers. Sections 301(b) and 306
authorize EPA to issue BAT and NSPS for all pollutants. EPA is also able to consider effluent guidelines
and determine that no action is necessary (see, for example, the Final Action Regarding Pretreatment
Standards for the Industrial Laundries Point Source Category [62 FR 66182]). The final regulatory option
chosen for the C&D industry is discussed in the Federal Register Notice.
6-2
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6.2.2 Significant Issues Raised by Public Comment
The significant issues raised by public comment that specifically address small business issues are
as follows:
Some commenters were concerned that due to economies of scale, the very smallest firms
would be affected more than the typical firms by Options 1 and 2, since their costs per
acre would be higher. Others asked EPA to consider only sites where 5 acres or more are
disturbed to minimize impacts on small business. The very smallest firms are not likely to
be affected by any of the options, since they are highly unlikely to disturb an acre of land
in any one project. See also below about concerns for builders with one to four starts
annually.
NAHB believes EPA did not meet the statutory requirements of an IRFA because the
SBREFA Panel conclusions and descriptions of small business outreach were not
presented in the EA and because NAHB believed that no impact results for small
businesses were presented. EPA, however, provides the SBREFA Panel conclusions and
all information pertinent to the SBREFA process in the rulemaking record (see U.S. EPA,
2001). EPA disagrees that no impact results were presented and refers to Section 6.4 of
the EA for the proposal (U.S. EPA, 2002), which specifically discusses impacts on small
business, showing results of a revenue test. A revenue test is recommended by EPA
guidance (U.S. EPA, 1999) for determining the magnitude of impact on small business in
an IRFA.
Several commenters were concerned that small businesses were not adequately identified
because EPA considered builders that undertake one to four starts annually to be
unaffected by Option 1 and builders that undertake five to nine starts annually to be
unaffected by Option 2. However, the criteria to trigger a site's compliance with the
options considered is disturbed acreage on a single site. The commenters appear to
believe the standard is total area of all lots built on in the course of a year. For example
in order for a builder who builds one to four homes in a year to trigger the 1-acre
threshold, the builder would probably need to build most of its annual units on one site
and disturb all of every lot. EPA found this scenario unlikely. The types of builders that
commonly build one to four units do so on isolated lots, with work spread out over the
course of the year. The same issue arises with the builders constructing five to nine units
under a 5-acre threshold. EPA continues to believe these cutoffs in analytical
populations are reasonable, and that it is unlikely that EPA has systematically
underestimated numbers of small businesses affected or the impact of the options on
these small businesses.
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6.2.3 Steps Used to Minimize Impacts
EPA took several steps to minimize impacts under each option considered. Option 1 minimizes
impacts by limiting the scope of the option to projects disturbing more than 1 acre of land and by
requiring only inspection and certification, rather than requiring the industry to meet a technology-based
standards. Option 2, while more stringent and requiring that an ELG be met, limits the scope to projects
that disturb more than 5 acres. This cutoff for Option 2 is designed in part to strongly limit the numbers
of small businesses that might be subject to an ELG. Furthermore, since the ELG is designed to codify
the provisions of the CGP, which serves as the model for several states, EPA has determined that a large
portion of projects and firms will not be incrementally affected. Option 3, the no-action alternative, is the
ultimate impact minimizing option, since it does not impose any incremental requirements on any firm
regardless of size. Since proposal, EPA has further contemplated option modifications to minimize
impacts and has restructured Option 2 to omit the enhanced inspection and BMP certification
requirements, naming this modified Option 2 as Option 4. Option 4, therefore, offers a further reduction
in the impacts compared to Option 2. Thus, in assessing all of the options under consideration, EPA has
sought to minimize impacts on small businesses.
6.2.4 Estimated Number of Small Business Entities to Which the Final Action Will Apply
6.2.4.1 Definition of Affected Small Entities
The RFA defines a "small entity" as a small not-for-profit organization, small governmental
jurisdiction, or small business (which is defined at the firm level, not at the establishment level). EPA
expects that the principal impact of the C&D options on small entities will fall on small businesses that
undertake C&D activities and small governmental units involved in permitting C&D activities.1 Section
6.3 addresses impacts on small businesses. Section 6.2.5 discusses impact on small governmental units
(also see Chapter Nine for a discussion of impact on small governmental units).
1 While some governmental and nonprofit entities may engage directly in C&D activities (i.e., undertake
C&D work of their own accord), complete information is not available to warrant inclusion of governmental or
nonprofit entities in this analysis. For this reason, this analysis focuses only on small businesses.
6-4
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The RFA provides, with some exceptions, that EPA define small businesses according to the size
standards established by SBA. SBA establishes criteria for identifying small businesses based on either
the number of employees or annual revenues (13 CFR 121).2 These size standards vary by NAICS (North
American Industrial Classification System) code, and previously by Standard Industrial Classification
(SIC) codes. Qualifying revenue levels differ among NAICS industries, and within the C&D industry
there are a range of qualifying revenue levels, from $5.0 million for NAICS 23311 (land subdivision and
development) to $27.5 million for the majority of industries within NAICS 233 and 234. For businesses
in the special trades industries, the small business size threshold is $11.5 million in revenues. Table 6-1
summarizes the SBA revenue thresholds for small businesses in each of the C&D industries.3
6.2.4.2 Number of In-Scope Small Firms Affected by the Regulatory Options
EPA estimated the number of small firms affected by the options considered through a series of
steps, as follows:
EPA estimated the number of establishments in the C&D industry.
EPA estimated the number of establishments covered by the various options and
excluded those expected not to be affected by option requirements to produce the number
of "in-scope," affected establishments).
Based on the number of establishments considered in scope and affected, EPA estimated
the number of in-scope and affected firms in the C&D industry.
2 Employees counted in determining size include all individuals employed on a full-time, part-time,
temporary, or other basis. Employment is measured as the average number of employees for each pay period over
the previous 12 months. For standards based on revenues, SBA uses the average revenues over the last three
completed fiscal years.
3 Under the new 2002 NAICS structure, size standards for construction firms have been updated to $6.0
million for NAICS 23311 (Land subdivision and development), $28.5 million for the majority of industries within
NAICS 233 and 234, and $12 million for NAICS 235930 and 235940 (Excavation contractors and Wrecking and
demolition contractors) (U.S. SBA, 2002). This change is not reflected in this EA, since SBA data does not classify
firms at this level of detail. The closest categories by revenues available (<$7.5 million, <$25 million, and <$100
million) are already being used to approximate the $5.0 million and $27.5 million cut-offs. See note to Table 2-12
in Chapter Two.
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EPA estimated the number of these firms considered small.
EPA estimated the proportion of firms located in states deemed to have stormwater
requirements equivalent to the CGP provisions of Options 2 and 4 so that the higher
CGP-affected costs per acre could be used with the appropriate number of small firms
(see Chapter Four, Section 4.2.2 for more information on the differences between state-
level costs per acre in "equivalent" vs. "non-equivalent" states).
Table 6-1. SBA Small Business Definitions for the C&D Industry
NAICS Code
Description
SBA Revenue Size
Cutoff (Millions)
233110
Land subdivision and land development
$5.0
233210
Single-family housing construction
$27.5
233220
Multifamily housing construction
$27.5
233310
Manufacturing and industrial building construction
$27.5
233320
Commercial and institutional building construction
$27.5
234110
Highway and street construction
$27.5
234120
Bridge and tunnel construction
$27.5
234910
Water, sewer, and pipeline construction
$27.5
234920
Power and communication transmission line construction
$27.5
234930
Industrial nonbuilding structure construction
$27.5
234990
All other heavy construction
$27.5
235930
Excavation contractors
$11.5
235940
Wrecking and demolition contractors
$11.5
Source(s): 13 CFR 121 (Small Business Size Regulations; Size Standards and the North American Industry Classification
System; Correction); U.S. SBA 1998: Firm Size Data (see ').
Number of Establishments in the C&D Industry
The first step in the small entity analysis is to determine the number of establishments in the C&D
industry. EPA developed estimates of the number of potentially affected establishments in Chapter Two
(see Table 2-14). EPA estimated that as many as roughly 262,000 establishments might be covered under
the regulatory options considered.
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Number of In-Scope and Affected Establishments
The estimate of 262,000 establishments include a number of establishments EPA believes will not
be in-scope or affected by the regulatory options. EPA subtracted 62,400 establishments judged to be
primarily engaged in remodeling activities and 50,661 homebuilding establishments that construct fewer
than four homes per year and that were judged unlikely to disturb more than 1 acre of land on a regular
basis. This approach produced an estimate of 148,553 potentially in-scope businesses under Option 1
(see Table 2-13). This table also reflects the fact that EPA distributed establishments in the land
development industry (NAICS 2331) among the four building construction industries (NAICS 23321,
23322, 23331, and 23332) due to data limitations for the land development industry.
These establishments include those that construct a number of houses or units in the single-family
and multifamily construction sectors that are not likely to disturb 5 or more acres of land. A total of
12,708 establishments are estimated to build five to nine single-family homes per year and 1,904
establishments are estimated to build two to nine multifamily units per year. These two groups of
establishments are expected not to disturb 5 or more acres per year in undertaking this level of
construction activity. When these establishments are excluded, EPA estimates that 133,941
establishments might be in scope (See Chapter Two, Table 2-14. Similar adjustments are not made for
the nonresidential or nonbuilding construction sectors. See Chapter Four, Section 4.2.2.
EPA also does not include special trades (NAICS 235) in the small entity analysis because EPA
does not believe that these businesses (e.g., plumbers, electricians, finish carpenters) are likely to be the
firms responsible for meeting option requirements. Furthermore, EPA believes that if required to meet
these options, these firms would generally pass costs back up to the general contractor by incorporating
these costs into their bids. With special trades removed, 128,782 establishments remain potentially
affected under Option 1, and 114,170 remain potentially affected under Options 2 and 4 (see Chapter
Two, Table 2-14).
The final distribution of in-scope establishments used in the small entity analysis is shown in
Table 6-2. These include both small and large establishments. The number of businesses these
establishments represent is discussed below. It is the business entity, not the establishment, that is
generally relevant under the RFA.
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Table 6-2. Number of In-Scope Establishments by Option in the C&D Industry
NAICS
Industry
Option 1
Options 2 and 4
Number
Percent of
Total
Number
Percent of
Total
23321
Single-family residential building
construction
34,070
26.5%
21,362
18.7%
23322
Multifamily residential building construction
4,603
3.6%
2,699
2.4%
23331
Manufacturing and industrial building
construction
7,742
6.0%
7,742
6.8%
23332
Commercial and institutional building
construction
39,810
30.9%
39,810
34.9%
23411
Heavy construction
42,557
33.0%
42,557
37.3%
Potentially affected establishments
128,782
100.0%
114,170
100.0%
Totals may not add due to rounding.
See also Chapter Two, Table 2-14 and Chapter Four, Table 4-7. The difference between this table and Table 4-7 is that this
table includes the entire potentially affected heavy construction sector, not just highway construction.
Source: U.S. Census Bureau (2000a) and EPA estimates.
Number of In-Scope and Affected Firms
To estimate the number offirms affected by the options considered, EPA first examined the ratio
of businesses to establishments from SBA (1998) data.4 Table 6-3 shows these ratios.
The ratio of firms to establishments is almost one-to-one for all establishments with fewer than
100 employees. Based on this analysis, EPA assumes that all small establishments are single-
establishment firms and makes no adjustments to numbers of firms. Firms and establishments for the
purposes of this analysis are thus considered equivalent.
4 For clarification, an establishment is defined as "a relatively permanent office or other place of business
where the usual business activities related to construction are conducted" (Census 2000). A business (or firm)
refers to the aggregation of all establishments owned by one company; therefore one business may consist of several
establishments.
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Table 6-3. Ratio of Businesses to Establishments by Employment Size Class
Employment
Class
23321
Single-Family
Housing
Construction
23322
Multifamily
Housing
Construction
23331
Manufacturing
and Industrial
Building
Construction
23332
Commercial and
Institutional
Building
Construction
23411
Heavy
Construction
1 to 4
1.000
1.000
1.000
1.000
0.999
5 to 9
1.000
0.999
1.000
1.000
0.999
10 to 19
0.999
1.000
0.999
0.998
0.997
20 to 99
0.993
0.994
0.997
0.991
0.991
100 to 499
0.661
0.884
0.973
0.821
0.860
500+
0.203
0.540
0.558
0.327
0.215
Source: U.S. SBA(1998).
Number of Small Firms Affected
To estimate the number of small businesses, EPA examined the distribution of revenues per
establishment by size of establishment (see Table 6-4). This review concluded that average revenues for
establishments below 100 employees in size are consistently below the SBA small business size threshold
($27.5 million per year) while average revenues for establishments with more than 100 employees
consistently exceed the SBA threshold.5 EPA, thus, concluded that the number of businesses with 100 or
fewer employees would be a good proxy for the number of businesses that fall below the SBA revenue
size threshold. EPA received no comments on this assumption. EPA used this approach for determining
the number of small businesses in the commercial, industrial, and heavy construction sectors. For these
sectors, EPA estimates the percentage of small businesses to be 96.9 percent, 98.2 percent, and 94.9
percent in the industrial, commercial, and highway construction sectors, respectively.
These percentages were calculated using the total number of establishments with the number of
establishments with fewer than 100 employees as shown in Table 6-4. EPA then applied these numbers
to the 7,742; 39,810; and 11,270 establishments in the industrial, commercial, and highway construction
5 EPA notes that while the SBA threshold applies to businesses not establishments, there are very few
multi-establishment businesses in the below 100-employee size classes; therefore, the use of average establishment
revenues is appropriate.
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Table 6-4. Establishments by Employment Class and Revenues per Establishment
Employment Class
Number of Establishments
Revenues per Establishment
($l,000s)
Single-Family Housing Construction (NAICS 23321)
1 to 4
106,985
$412
5 to 9
21,377
$1,299
10 to 19
7,234
$2,991
20 to 991
3,022
$12,073
100 to 4992
222
$75,923
500+3
10
$174,764
Subtotal
138,850
$1,760
Multifamily Housing Construction (NAICS 23322)
1 to 4
4,725
$383
5 to 9
1,456
$1,474
10 to 19
782
$3,612
20 to 991
532
$10,692
100 to 4992
46
$40,855
500+3
3
$122,949
Subtotal
7,544
$1,070
Manufacturing and Industrial Building Construction (NAICS 23331)
1 to 4
3,136
$459
5 to 9
1,666
$1,529
10 to 19
1,261
$2,926
20 to 991
991
$10,891
100 to 4992
195
$46,414
500+3
30
$217,247
Subtotal
7,279
$4,682
Commercial and Institutional Building Construction (NAICS 23332)
1 to 4
17,722
$467
5 to 9
7,644
$1,490
10 to 19
5,861
$3,434
20 to 991
5,518
$12,663
100 to 4992
637
$77,162
500+3
48
$342,102
Subtotal
37,430
$437,317
Heavy Construction (NAICS 23411)
1 to 4
4,154
$281
5 to 9
1,987
$939
10 to 19
1,876
$1,998
20 to 991
2,683
$7,124
100 to 4992
544
$35,823
500+3
26
$118,810
Subtotal
11,270
$4,301
a Combined data from Census 20 to 49 and 50 to 99 employment classes.
b Combined data from Census 100 to 249 and 250 to 499 employment classes.
c Combined data from all Census employment classes of more than 500 employees.
Source: Census (2000); U.S. SBA (1998).
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sectors, respectively (see Table 6-2). This analysis yields 7,502; 39,081; and 10,700 small establishments
in these industries.
For the single-family and multifamily construction sector, EPA had housing start data from the
2000 Census that allowed EPA to eliminate large establishments, which EPA determined to be those with
more than 499 starts. Table 6-5 shows the number of establishments by start class. EPA also adjusted the
number of small businesses by eliminating the number of establishments that made no starts in 1997.6 The
total number of small businesses is, therefore, 74,787 in the single-family construction sector and 3,173 in
the multifamily construction sector. The total number of small businesses in all sectors (housing and
nonhousing) sums to 135,243.
The last step of this analysis was to eliminate the one to four housing start classes in the single-
family sector that EPA considers unlikely to be affected by Option 1 (50,661 firms) and the five to nine
housing start class in the single-family sector and the two to nine units start class in the multifamily
sector, similar to the way in which these groups were eliminated as discussed in Chapter Two (see Table
2-14). Table 6-6 shows the results of the designation of small business. The first column uses the in-
scope total establishments under the options as shown in Table 2-14 and Table 4-7. Based on the
assumption that these firms fall below the SBA-defined revenue threshold and can be considered "small"
firms, EPA estimates there are 84,582 potentially affected small firms (representing 86.8 percent of all
potentially affected businesses) under Option 1 and 69,970 potentially affected small firms (representing
84.4 percent of all potentially affected firms, respectively). Note that the table includes only the highway
construction portion of the heavy construction sector. No analyses were run on the other heavy
construction firms, but results are discussed qualitatively in Section 6.3 to the extent that they might apply
to the other heavy construction firms.
6 The firm analysis in Chapter Five did not specifically remove no-start establishments in the counts of
affected firms. They were, however, removed from the denominator at the end of the firm analysis to avoid dilution
of impacts when percentage of firm impacts were derived. These establishments would not incur impacts in the
year of the analysis.
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Table 6-5. Number of Establishments in the Single-Family and Multifamily
Constructionlndustries Sectors by Starts Class
Start Class
Count of Establishments
Single-Family Housing Construction (NAICS 23321)
0
9,833
1 to 4
50,661
5 to 9
12,708
10 to 24
7,462
25 to 99
3,179
100 to 499
777
Start Class
Count of Establishments
500+
111
Total
84,731
Total Small Business
74,787a
Multifamily Housing Construction (NAICS 23322)
0
1,390
2 to 9
1,904
10 to 24
616
25 to 99
359
lOOto 499
293
500+
41
Total
4,603
Total Small Business
3,173a
a Excludes those with no starts and 500 or more starts.
Source: Census (2000); EPA estimates.
Number of Small Firms in States Affected by the CGP Provisions of Options 2 and 4
The last adjustment EPA made to the number of firms in the small business analysis was to
estimate the number of firms that will incur the costs associated with meeting the provisions in Options 2
and 4 for codifying the CGP. These firms are located in states without stormwater requirements
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Table 6-6. Estimated Number of Small Businesses Potentially Affected by the Options
Considered
NAICS
Potentially Affected
Potentially Affected Small Firms
Affected Small
Firms as a Percent
of Total for
Individual Industry
Number
Percent of All Small
C&D Firms
Option 1
233210: Single-family
housing construction
34,070
24,126
28.5%
70.8%
233220: Multifamily
housing construction
4,603
3,173
3.8%
68.9%
233310:
Manufacturing and
industrial building
construction
7,742
7,502
8.9%
96.9%
233320: Commercial
and institutional
building construction
39,810
39,081
46.2%
98.2%
23411 Heavy
construction3
11,270
10,700
12.7%
94.9%
Total
97,495
84,582
100.0%
86.8%
Options 2 and 4
233210: Single-family
housing construction
21,362
11,418
26.3%
53.4%
233220: Multifamily
housing construction
2,699
1,269
3.3%
99.3%
233310:
Manufacturing and
industrial building
construction
7,742
7,502
9.2%
96.9%
233320: Commercial
and institutional
building construction
39,810
39,081
48.1%
98.2%
23411 Heavy
construction2
11,270
10,700
13.1%
94.9%
Total
82,883
69,970
100.0%
84.4%
a Includes only the highway construction sector. See Table 6-2 for the full count of heavy construction establishments.
Source: EPA estimates.
considered equivalent to the CGP (the non-equivalent states). Under Option 4, the per-acre costs for
meeting Option 4 (the CGP-affected per-acre costs; see Chapter Four, Section 4.2.2) are used to estimate
impacts for firms in the non-equivalent states using the numbers of such firms (18,401 firms) as shown in
Table 6-7. The calculation of impacts under Option 2 is more complex. The same number of firms is
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assigned the per-acre costs associated with meeting the CGP-affected per-acre costs (which include costs
associated with both the CGP component and the inspection and certification component). The remaining
firms (51,678 firms in equivalent states) are assigned only the inspection and certification costs for
calculating impacts. The impacts on both sets of firms are then added. See also Chapter Four, Section
4.2.2.
Table 6-7. Estimate of Numbers of Small Firms in "Equivalent" and "Non-Equivalent"
States3
NAICS
Total Number of
Small Firms
Total Number of
Small Firms in
Equivalent States
Total Number of
Small Firms in Non-
Equivalent States
233210: Single-family
housing construction
11,418
8,632
2,786
233220: Multifamily
housing construction
1,268
977
291
233310: Manufacturing
and industrial building
construction
7,503
5,616
1,887
233320: Commercial
and institutional
building construction
39,081
28,182
10,899
23411 Heavy
construction3
10,700
8,009
2,691
Total
69,970
51,416
18,554
a Based on EPA's assessment of states with stormwater requirements considered equivalent to the CGP
requirements. See Chapter Four, 4.1.2, and U.S. EPA, 2004.
Source: EPA estimates.
6.2.5 Description of Recordkeeping, Reporting, and Other Requirements
Options 1 and 2 contain recordkeeping and reporting requirements for entities in the C&D
industry. Option 3 imposes no incremental requirements on any C&D operation. Option 4 also imposes
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no incremental recordkeeping and reporting requirements for inspection and certification, but may impose
implementation costs for general permit development. In Chapter Five, EPA estimated the costs
associated with the additional requirements imposed on C&D establishments as a result of Options 1 and
2. This section focuses specifically on the costs and burden associated with recordkeeping, reporting, and
related requirements. These costs and burdens were developed at proposal (see U.S. EPA, 2002) and
have not been re-evaluated.
For the purpose of this analysis, "burden" means the total time, effort, or financial resources
expended to generate, maintain, retain, disclose, or provide information to or for a federal agency. Total
time includes the time needed to:
Review instructions. Develop, acquire, install, and utilize technology and systems for the
purposes of collecting, validating, and verifying information.
Process and maintain information.
Disclose and provide information.
Adjust existing procedures to comply with any previously applicable instructions and
requirements.
Train personnel to be able to respond to a collection of information request.
Search data sources.
Complete and review the collection of information.
Transmit or otherwise disclose the information.
EPA estimated that states will incur some costs related to implementation of Options 1, 2, and 4
Specifically, general permit development and implementation of the inspection and certification
provisions (for Options 1 and 2) are estimated to require approximately 200 labor hours per state during
the first three years of program implementation. See Chapter Five, Section 5.8 for full details.
EPA analyzed costs to government units under the assumption that the majority of Phase I and
Phase II stormwater NPDES permit programs and state requirements are fully implemented. Any new
regulatory requirements will be incremental to the costs of these programs. The analysis in Chapter Five
concluded that if Phase I and Phase II are fully implemented by communities, Option 1 will not add any
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additional, recordkeeping burden reporting or burden to government units. Options 2 and 4 will add 200
labor hours per state to codify the CGP.
A significant new requirement for construction firms contained in both Option 1 and Option 2
will be maintenance of a site log book. The site log will record the date of initial groundbreaking and any
inspection or maintenance activities related to erosion and sediment control. The availability of the log
must be posted on the site and the log must be made available to government inspectors and the public.
This is a recordkeeping requirement only, and no information will be collected. EPA estimates that site
log will require 8.7 hours per year for each construction firm respondent. EPA further assumes that all
recordkeeping tasks will be performed by an engineering assistant. The fully loaded hourly wage for the
engineering assistant labor category in the construction industry, based on data from the U.S. Department
of Labor, Bureau of Labor Statistics, is $38.47 per hour. Thus, the 8.7 hours per year burden implies an
average annual cost of $335 for each firm. Since there are an estimated 95,753 small firms potentially
subject to Option 1, the annual cost of the site log requirement is estimated to be $32.07 million. This is
the largest portion of the inspection costs discussed in Chapter Five. Because Option 2 excludes firms
disturbing less than 5 acres each year from the site log requirement, the total costs of this requirement to
small business will be reduced. Option 4 is not associated with any of these costs.
6.3 EPA'S ANALYSIS OF SMALL BUSINESS IMPACTS
The following sections describe the methodologies and results for the economic impact analysis
of the three options considered on small businesses in the C&D industry. As discussed elsewhere, this
analysis uses a baseline that assumes full compliance with Phase I and II requirements, as well as
applicable state regulations.
6.3.1 Classification of Model Firms for Impact Analysis
For its economic impact analysis, EPA used the same model firms that comprise the C&D/FrMS
(see Chapter Four, Section 4.2.2). The data used to construct the model firms is different, however, from
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the data used to define small firms. This section describes how EPA applied its analysis of small business-
owned firms to the model firms used in the impact analysis.
In the single-family and multifamily housing construction industry sectors (NAICS 233210 and
233220, respectively), EPA used multiple model firms based on the number of housing starts performed
by the establishment per year for its economic impact estimates. EPA compared the model facility data
by starts class with both the 1997 Census of Construction data by employment class and the SBA size
standard for small business status. Table 6-8 presents key model facility data by starts class.
Table 6-8. Key Model Faci
ity Data by Housing Starts Classification Category
Number of Units Started
Average Number of Employees
Average Value of Construction
Work ($1,000)
NAICS 233210
Single-Family Housing Construction
1 to 4
2.5
$492
5 to 9
3.3
$1,089
10 to 24
4.3
$1,987
25 to 99
8.6
$4,923
100 to 499
32.1
$24,031
500+
160.0
$109,033
NAICS 233220
Multifamily Housing Construction
2 to 9
3.2
$645
10 to 24
5.1
$1,382
25 to 99
8.0
$3,500
100 to 499
13.5
$7,410
500+
64.7
$43,844
Source: EPA estimates based on Rappaport and Cole (2000).
Single-family housing construction establishments with 100 to 499 starts per year employ, on
average, 32 workers per establishment and earn $24 million in revenues. Establishments with fewer starts
tend to employ fewer workers and have lower average revenues. Conversely, establishments with more
than 500 starts per year employ on average 160 workers and earn revenues in excess of $109 million per
establishment.
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Multifamily housing construction establishments with 100 to 499 starts per year employ, on
average, 13.5 workers per establishment and earn $7.4 million in revenues. Establishments with more
than 500 starts per year employ on average 65 workers and earn revenues of $44 million per
establishment. Although average employment per establishment in the 500+ start class does not exceed
100 workers, employment per establishment in that class is almost five times larger than the 100 to 499
starts class in the multifamily construction sector.
The natural break points in the employment and revenue per establishment data by housing start
class match reasonably well with those from the 1997 Census of Construction data described in Section
6.2.2. Therefore, for the purpose of this analysis, EPA assumes that firms with fewer than 500 housing
starts per year in both the 233210 and 233220 NAICS codes are small business-owned establishments,
and firms in the 500+ starts class represent large business-owned establishments. Note that based on
1997 Census of Construction figures by employment class, EPA estimated 99.8 percent of establishments
in NAICS 233210 and 99.4 percent of establishments in NAICS 233220 overall are small business-
owned. Based on the Census Housing Starts Statistics special study, EPA estimated that 99.7 percent of
establishments in NAICS 233210 and 98.4 percent of establishments in NAICS 233220 overall are small
business-owned.7
To estimate the number of small firms potentially affected by the options considered, EPA first
projected impacts for each model firm and extrapolated those to the firms represented by the model. If
the model firm has fewer than 500 starts per year, then all impacts to firms represented by that model firm
are incurred by small firms; impacts to firms represented by the model firm for the 500+ starts class are
incurred by large firms.
In the manufacturing and industrial, commercial and institutional, and heavy construction
industries, (NAICS codes 233310, 233320, and 23411, respectively), a single model firm was used for the
economic impact analysis. Selection of the model firm for each industry was based on median revenue by
employment class. Because EPA used a single model firm in each of these industries, it is not appropriate
7 Small differences arise in estimating the percentages of total establishments in the industry that are small
business-owned because of differences in how the data are arranged. SB A sets its definition of "small" by firm
revenues. The census data available to EPA is arranged by employment class, not revenues, however, while data in
the Census Special Study used to develop model establishments is arranged by starts class, not revenues or
employment. Thus, minor discrepancies in percentages that are insignificant to the analysis will occur.
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to designate the model firm as owned by a small or large business. Therefore, EPA calculated the
percentage of firms that are small, as estimated from the 1997 Census of Construction, and applied that
percentage to all impacts to estimate small business impacts in these sectors. For example, approximately
97 percent of establishments in NAICS 233310 are small businesses. If 100 establishments in that
NAICS code are projected to incur compliance costs exceeding 1 percent of revenues, EPA assumes that
97 of those establishments are small firms.
6.3.2 Revenue Test Methodology
EPA assessed the impacts to small businesses by examining the ratio of estimated compliance
costs to business revenues. Impacts are determined by the number and percentage of businesses incurring
costs that exceed 1 percent and 3 percent of revenues.
EPA's primary tool for projecting revenue test impacts is the C&D/FrMS and its component firm
models. For each model firm, it is straightforward to divide estimated business-level compliance costs by
model firm revenues. However, this calculation answers only part of the question concerning the impact
of the options considered on small business entities. To determine the number and percentage of
businesses exceeding the revenue test thresholds, EPA considered not only the model firm, but the
businesses represented by that model as well. The model firm actually represents a set of approximately
similar businesses (e.g., similar levels of employment within some bounded range) with revenues that
form a statistical distribution around the model firm's revenue figure. Some businesses in this statistical
distribution will have revenues below those of the model business while others will have revenues above
those of the model business. Therefore, simply examining the ratio of compliance costs to revenues for
the model business is insufficient. If, for example, the model firm incurs compliance costs that are less
than 1 percent of revenues, a conclusion that no businesses are affected by the option is unwarranted. It is
highly likely that other businesses represented by the model have lower revenues and therefore may well
incur costs exceeding 1 percent of revenues.
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To address this issue, EPA developed estimates of the statistical revenue distribution of firms
represented by each model firm.8 EPA then used those distributions to estimate the number and
percentage of small firms in each industry that incur compliance costs exceeding 1 and 3 percent of
revenues. EPA used model firm revenues for the mean of each distribution, but had no direct information
concerning the dispersion of firm income around each model firm. EPA, therefore, developed the
distributions by making reasonable assumptions about the variance and shape of the distribution. To deal
with the uncertainty caused by the lack of direct evidence about the shape of the distribution, EPA used
two different assumptions about the distribution of revenues to generate a range of impacts.
Development of Revenue Distributions
The two curves in Figure 6-1 represent the cumulative distribution functions for two different sets
of assumptions concerning the distribution of establishment income around a hypothetical model firm
mean of $1.0 million in annual revenues. The cumulative distribution function is used to determine the
probability j that a random variable x is less than or equal to some specified value. It is appropriate to use
the cumulative distribution function for this application because EPA is concerned with the probability
that an establishment earns less than some specified level of revenues. For example, if estimated
establishment compliance costs for this model firm class are equal to $15,000, then any establishment in
this model firm class that earns revenues less than $1.5 million will incur compliance costs that exceed 1
percent of revenues. Thus, EPA uses the cumulative distribution function to estimate the probability that
a firm earns revenues of $1.5 million or less.
As a starting point for its analysis, EPA examined the implications of assuming that income is
normally distributed and has a standard deviation equal to the mean. That is, the coefficient of variation
(standard deviation divided by mean) for this distribution is equal to 1. In Figure 6-1, this is represented
8 As described in Section 6.2.2, EPA determined that in the construction industry, the small business is
essentially identical to the small business-owned establishment.
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by the curve labeled "unit normal." An implication of the unit normal distribution for this analysis is that
some firms are projected to earn negative revenues. This can be observed by examining the y axis; the
unit normal distribution assumption results in about a 15 percent probability of an establishment earning
negative revenues. While negative income (e.g., net income, cash flow) is both possible and plausible for
a firm, negative revenue is not.9
Figure 6-1
Baseline Distribution Functions
for Facility Revenues
t' /
/
1
1
1 ,
1
1 /
t
,1
;i /
; y
',/1
7 i
/ i
/ t
j
$0 $1,000 $2,000 $3,000 $4,000
Rewnues (x $1,000)
Unit Normal
Lognormal
Gitical Valus
9 EPA examined an alternative assumption that income is normally distributed, but with standard deviation
such that there was zero probability of an establishment earning negative revenues. This adjustment results in a
coefficient of variation equal to about 0.29. EPA determined that this was probably not a reasonable distribution for
use in this analysis because the probability of an establishment earning low revenues is quite small. For example,
using the hypothetical mean revenues of $1 million, the probability of an establishment earning revenues less than
$500,000 is only about 5 percent; the probability of an establishment earning revenues between $500,000 and $1.0
million is about 45 percent.
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EPA then examined the implications of using a lognormal distribution. EPA estimated the mean
and standard deviation for the lognormal distribution through a standard transformation of the mean and
standard deviation of the unit normal distribution. Using this transformation, the lognormal distribution
can be interpreted as having the same mean and standard deviation as the equivalent unit normal
distribution, but a skewed distribution (unlike the normal distribution, which is symmetric). In
Figure 6-1, for example, the probability of establishment revenues less than or equal to $1.0 million is 50
percent under the unit normal distribution assumption, as is the probability of revenues greater than $1.0
million. Under the lognormal distribution assumption, about 66 percent of establishments have income
less than or equal to $1.0 million, and about 34 percent have income greater than $1.0 million.
The distribution of firm revenues may be skewed because it is probable—but infrequent—that
some firms in any model class will perform extremely well and earn very high revenues relative to other
establishments; there is no inherent limit to the revenues such a firm might earn. Conversely, there is a
limit to the minimum revenues even the poorest performing firms will earn; poor performers cannot earn
less than zero revenues. Such a distribution would tend to be skewed as is the lognormal distribution in
Figure 6-1.
Application of Revenue Distributions to Estimating Small Business Impacts
Given the revenue distributions developed in the preceding section, EPA applied the
distributions to the problem of estimating revenue test impacts as follows. First, EPA used revenues for
each model firm from the five major construction industries (i.e., single-family, multifamily,
manufacturing and industrial, commercial and institutional, and heavy construction) as the mean of the
distribution for each model class. EPA then set the standard deviation for each model class' distribution
equal to its mean. With mean, standard deviation, and two alternative assumptions concerning the shape
of the distribution (normal or lognormal), EPA calculated the probability that revenues are less than or
equal to any given value for each model class.10
10 For calculation purposes, EPA used the @NORMAL and @LOGNORMDIST functions in the Lotus
spreadsheet program.
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After estimating the compliance costs per firm for each option, EPA calculated the level of
revenues at which the estimated compliance costs would exactly equal 1 percent and 3 percent of
revenues. EPA then used its two distributions to calculate the probability that firms have revenues less
than or equal to these specified levels. These probabilities provide the range for the percentage of firms
projected to incur compliance costs exceeding the one percent and three percent thresholds. Multiplying
these probabilities by the number of firms in the model class provides the range for the number of firms
projected to incur compliance costs exceeding the 1 percent and 3 percent thresholds. Note that EPA
chose to truncate the unit normal distribution at zero revenues because, analytically, the region of the
distribution showing some probability of negative revenues cannot be appropriately evaluated.
This process is illustrated in Figure 6-1. The hypothetical model firm earns $1 million, the mean
for each distribution. If EPA estimates that annual compliance costs of $7,500 will be incurred by this
firm, then any firm in this model class earning less than $750,000 will incur compliance costs exceeding 1
percent of revenues, and any firm earning less than $250,000 will incur compliance costs exceeding 3
percent of revenues. The "critical value" in Figure 6-1 represents the 1 percent threshold (i.e., revenues
of $750,000). Based on the normal distribution, EPA would project that 22 percent of firms incur costs
exceeding the 1 percent threshold (i.e., the probability of revenues less than $750,000 is equal to 0.38,
while the probability of revenues less than $0 is equal to 0.16, thus, the net probability equals 0.22).
Based on the lognormal distribution, EPA projects that 54 percent of firms incur costs exceeding the same
threshold. These provide the lower and upper bounds for EPA's impacts estimates.
6.3.3 Small Business Impact Analysis Results
Tables 6-9a and 6-9b present the range of firms projected to incur compliance costs exceeding 1
percent and 3 percent of revenues, respectively, for each option under a zero percent cost passthrough
assumption. Tables 6-9c and 6-9d present the same results under an "estimated actual " cost passthrough
assumption. In each table, the "low" column denotes the results obtained assuming a normal distribution
and the "high" column indicates the results obtained using the lognormal distribution, as discussed in
Section 6.4.2.
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Table 6-9a. Estimated Number of Small Firms with Compliance Costs Exceeding 1 Percent of
Revenues—Zero Percent Cost Passthrough
Option
Single-family
Multifamily
Commercial
Number
% of Small
Businesses
Number
% of Small
Businesses
Number
% of Small
Businesses
Low
High
Low
High
Low
High
Low
High
Low
High
Low
High
1
0
49
0.0%
0.0%
0
6
0.0%
0.2%
0
103
0.0%
0.2%
2
401
477
0.5%
0.6%
55
84
1.7%
2.7%
474
756
1.2%
2.0%
3
0
0
0.0%
0.0%
0
0
0.0%
0.0%
0
0
0.0%
0.0%
4
345
352
0.5%
0.5%
48
65
1.5%
2.0%
349
652
0.9%
1.7%
Option
Industrial
Heavy
TOTAL
Number
% of Small
Businesses
Number
% of Small
Businesses
Number
% of Small
Businesses
Low
High
Low
High
Low
High
Low
High
Low
High
Low
High
1
0
9
0.0%
0.3%
0
58
0.0%
0.5%
0
225
0.0%
0.2%
2
93
141
1.2%
1.9%
353
426
3.3%
4.0%
1,376
1,884
1.0%
1.4%
3
0
0
0.0%
0.0%
0
0
0.0%
0.0%
0
0
0.0%
0.0%
4
72
124
1.0%
1.7%
174
272
2.2%
3.4%
988
1,465
0.7%
1.1%
Note: "Low" denotes result using normal distribution.
"High" denotes result using lognormal distribution.
Source: EPA estimates.
Under the zero cost passthrough scenario, the number of small businesses with costs exceeding 1
percent of revenues ranges from a low of 0 to 225 under Option 1, from a low of 1,376 to a high of 1,811
under Option 2, and from a low of 988 to a high of 1,465 under Option 4 (Table 6-9a). This is, at most,
only 1.5 percent of all small businesses. The number of small businesses with costs exceeding 3 percent
of revenues ranges from a low of 0 to a high of 78 under Option 1, from a low of 42 to a high of 571
under Option 2, and from a low of 24 to a high of 462 under Option 4 (Table 6-9b). The number of small
businesses incurring compliance costs exceeding the 3 percent of revenue threshold is 0.4 percent or less
for all options under the zero cost passthrough assumption.
Under the estimated actual cost passthrough scenario shown in Table 6-9c, the number of small
businesses with costs exceeding 1 percent of revenues ranges from a low of 0 to 30 under Option 1, from
6-24
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Table 6-9b. Estimated Number of Small Firms with Compliance Costs Exceeding 3 Percent of
Revenues—Zero Percent Cost Pass Through
Option
Single-family
Multifamily
Commercial
Number
% of Small
Businesses
Number
% of Small
Businesses
Number
% of Small
Businesses
Low
High
Low
High
Low
High
Low
High
Low
High
Low
High
1
0
16
0.0%
0.0%
0
2
0.0%
0.1%
0
34
0.0%
0.1%
2
16
130
0.0%
0.2%
5
18
0.2%
0.5%
10
242
0.0%
0.6%
3
0
0
0.0%
0.0%
0
0
0.0%
0.0%
0
0
0.0%
0.0%
4
10
111
0.0%
0.1%
3
15
0.1%
0.5%
6
209
0.0%
0.5%
Option
Industrial
Heavy
TOTAL
Number
% of Small
Businesses
Number
% of Small
Businesses
Number
% of Small
Businesses
Low
High
Low
High
Low
High
Low
High
Low
High
Low
High
1
0
7
0.0%
0.1%
0
19
0.0%
0.2%
0
78
0.0%
0.1%
2
2
45
0.0%
0.6%
9
136
0.1%
1.3%
42
571
0.0%
0.4%
3
0
0
0.0%
0.0%
0
0
0.0%
0.0%
0
0
0.0%
0.0%
4
1
40
0.0%
0.5%
4
87
0.4%
1.1%
24
462
0.0%
0.3%
Source: EPA estimates.
a low of 0 to a high of 213 under Option 2, and from a low of 0 to a high of 169 under Option 4. This
represents 0.2 percent or less of small businesses under any of the options. The number of small
businesses with costs exceeding 3 percent of revenues ranges from a low of 0 to a high of 9 under Option
1, from a low of 0 to a high of 71 under Option 2, and from a low of 0 to a high of 56 under Option 4
(Table 6-9d). This represents at most only 0.1 percent of all small businesses under any of the options.
Because EPA's analysis of the heavy construction sector is limited to the highway construction
segment, EPA's results only reflect this portion of the industry. Given the minimal impacts in the
construction industries that EPA was able to analyze (at most, 0.2 percent of small firms in all of the other
construction sectors are expected to experience costs exceeding 1 percent of revenues), EPA believes that
the options will have minimal impact on small businesses in other portions of the heavy construction
sector.
6-25
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Table 6-9c. Estimated Number of Small Firms with Compliance Costs Exceeding 1 Percent of
Revenues—Estimated Actual Cost Passthrough
Option
Single-family
Multifamily
Commercial
Number
% of Small
Businesses
Number
% of Small
Businesses
Number
% of Small
Businesses
Low
High
Low
High
Low
High
Low
High
Low
High
Low
High
1
0
7
0.0%
0.0%
0
1
0.0%
0.0%
0
10
0.0%
0.0%
2
0
53
0.0%
0.1%
0
7
0.0%
0.2%
0
68
0.0%
0.2%
3
0
0
0.0%
0.0%
0
0
0.0%
0.0%
0
0
0.0%
0.0%
4
0
45
0.0%
0.1%
0
6
0.0%
0.2%
0
59
0.0%
0.2%
Option
Industrial
Heavy
TOTAL
Number
% of Small
Businesses
Number
% of Small
Businesses
Number
% of Small
Businesses
Low
High
Low
High
Low
High
Low
High
Low
High
Low
High
1
0
3
0.0%
0.0%
0
9
0.0%
0.1%
0
30
0.0%
0.0%
2
0
21
0.0%
0.3%
0
64
0.0%
0.6%
0
213
0.0%
0.2%
3
0
0
0.0%
0.0%
0
0
0.0%
0.0%
0
0
0.0%
0.0%
4
0
18
0.0%
0.2%
0
41
0.0%
0.5%
0
169
0.0%
0.1%
Source: EPA estimates.
6-26
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Table 6-9d. Estimated Number of Small Firms with Compliance Costs Exceeding 3 Percent of
Revenues—Estimated Actual Cost Pass Through
Option
Single-family
Multifamily
Commercial
Number
% of Small
Businesses
Number
% of Small
Businesses
Number
% of Small
Businesses
Low
High
Low
High
Low
High
Low
High
Low
High
Low
High
1
0
2
0.0%
0.0%
0
0
0.0%
0.0%
0
3
0.0%
0.0%
2
0
18
0.0%
0.0%
0
2
0.0%
0.0%
0
23
0.0%
0.1%
3
0
0
0.0%
0.0%
0
0
0.0%
0.1%
0
0
0.0%
0.0%
0
15
0.0%
0.0%
0
2
0.0%
0.1%
0
20
0.0%
0.1%
Option
Industrial
Heavy
TOTAL
Number
% of Small
Businesses
Number
% of Small
Businesses
Number
% of Small
Businesses
Low
High
Low
High
Low
High
Low
High
Low
High
Low
High
1
0
1
0.0%
0.0%
0
3
0.0%
0.0%
0
9
0.0%
0.0%
2
0
7
0.0%
0.1%
0
21
0.0%
0.2%
0
71
0.0%
0.1%
3
0
0
0.0%
0.0%
0
0
0.0%
0.0%
0
0
0.0%
0.0%
4
0
6
0.0%
0.1%
0
13
0.0%
0.2%
0
56
0.0%
0.0%
Source: EPA estimates.
6.4 REFERENCES
U.S. Census Bureau. 2000. 1997 Economic Census: Construction, United States. Various Reports.
Available online at: http://www.census.gov/epcd/ec97/us/US00Q 23.HTM.
U.S. EPA. 1999. Revised Interim Guidance for EPA Rulewriters: Regulatory Flexibility Act as Amended
by the Small Business Regulatory Enforcement Fairness Act. March 29. Available online at:
htto: //www. epa/ gov/sbrefa/documents/igui99 .pdf.
U.S. EPA. 2001. Final Report of the Small Business Advocacy Review Panel on EPA's Planned Proposed
Rule on National Pollutant Discharge Elimination System (NPDES) and Effluent Limitations
Guideline (ELG) Regulations for Construction and Development Activities. Washington, DC:
U.S. Environmental Protection Agency.
U.S. EPA. 2002. Economic Analysis of Proposed Effluent Guidelines and Standards for the Construction
and Development Category. Washington, DC: U.S. Environmental Protection Agency, EPA-821-
R-02-008, May.
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U.S. EPA. 2004. Development Document for Final Action for Effluent Guidelines and Standards for the
Construction and Development Category. Washington, DC: U.S. Environmental Protection
Agency. EPA-821-B-04-001.
U.S. GPO (U.S. Government Printing Office). 2000. Small Business Size Regulations; Size Standards
and the North American Industry Classification System; Correction. 13 CFR Part 121.
Washington, DC: Small Business Administration. Federal Register. 65(172): 53533-53558.
September 5. Available online at: htto://www.sba.»o\/librar\71a\vroom.html.
Rappaport B.A., T.A. Cole. (U.S. Census Bureau, Manufacturing and Construction Division). 2000.
Construction Sector Special Study: Housing Starts Statistics—A Profile of the Homebuilding
Industry.
U.S. SBA (Small Business Administration). 1998. Statistics of U.S. Businesses: Firm Size Data. Office
of Advocacy. Available online at: htto: //www .sba. gov/advo/stats/data.html.
U.S. SBA (Small Business Administration). 2002. Table of Small Business Size Standards Matched to
the North American Industry Classification System (NAICS 2002), Effective October 1, 2002.
Available online at: http://www.sba.gov/size/sizetable2002.pdf.
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CHAPTER SEVEN
WATER QUALITY BENEFITS
7.1 NWPCAM ANALYSIS METHODOLOGY
7.1.1 Description of the NWPCAM Model
The National Water Pollution Control Assessment Model (NWPCAM) is a national surface-water
quality model that simulates water quality improvements and economic benefits that result from water
pollution control policies. NWPCAM is designed to characterize water quality for the nation's network of
rivers, streams, and lakes. NWPCAM incorporates a water quality model into a system designed for
conducting national policy simulations and benefits assessments. NWPCAM is able to translate spatially
varying water quality changes into willingness-to-pay values that reflect the value that individuals place
on water quality improvements. In this way, NWPCAM is capable of deriving economic benefits
estimates for a wide variety of water pollution control policies.
NWPCAM's national-scale framework allows hydraulic transport, routing, and connectivity of
surface waters to be simulated in the 48 contiguous states. The model can be used to characterize source
loadings (e.g., point sources) under a number of alternative policy scenarios (e.g., loadings with controls).
These loadings are processed through the NWPCAM water quality modeling system to estimate instream
pollutant concentrations on a detailed spatial scale and to estimate policy-induced changes in water
quality. The model incorporates routines to translate estimated concentrations into a six-parameter water
quality index (WQI6) and an overall use support determination that provide composite measures of
overall water quality. The composite measures allow for the calculation of economic benefits associated
with the estimated water quality improvements. NWPCAM can be used to assess both the water quality
impacts and the social welfare implications of alternative policy scenarios.
NWPCAM 2.1 uses the Reach File 3 (RF3) database routing and connectivity information to
assign hydrologic sequencing numbers to each RF3 reach. The RF3 network includes 1,817,988 reaches
totaling 2,655,437 miles within the contiguous 48 states. A subset of this network, including only streams
7-1
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greater than 10 miles in length and the small streams connecting them, was extracted for this analysis. The
subset, Reach File 3 Lite (RF3Lite) database, capitalizes on the information in the RF3 database while
limiting the computational burden of coping with the full network. The RF3Lite network includes
575,991 reaches totaling 835,312 miles, or approximately one-third of the RF3 network. NWPCAM 2.1
includes instream routing routines to connect point source and nonpoint source loads from the RF3
network to RF3Lite. These routines rely primarily on first-order kinetics, using RF3 time of travel
estimates to model processes occurring outside of the RF3Lite network.
NWPCAM 2.1 simulates 11 water quality parameters:
Biochemical oxygen demand (BOD)
Total organic nitrogen (TON)
• Ammonia (NH3)
Nitrate-N and Nitrite-N (NOx)
Total organic phosphorous (TOP)
Ortho-phosphate (P04)
Algae chlorophyll (CHLA)
Dissolved oxygen (DO)
Chlorides (CI)
Total suspended solids (TSS)
Fecal coliform bacteria (FEC)
The original water quality index included nine indicators of water quality (McClelland, 1974). BOD, DO,
FEC, NOx, P04 and TSS are used in the WQI6. McClelland (1974) used turbidity in her assessment rather
than TSS. To incorporate TSS, a regression equation was used to convert the original graph of water
quality against turbidity into a graph of water quality against TSS. The water quality index is
multiplicative so the weights given to all of the components must sum to one. Thus, the weights for the
WQI6 components were revised to sum to one based on their weights in the original water quality index.
EPA focused on sediment loads from construction sites. Site experience was generalized using
appropriate adaptations to different weather, slope, and soil conditions in different regions of the country
to estimate changes in sediment loads. Details of this analysis may be found in the Development
7-2
-------
Document (U.S. EPA, 2004, Chapter Eight). The analysis generated an estimate of the change in total
suspended solids for 1,644 watersheds. To avoid double-counting, a portion of the background non-point
source TSS loads were removed from the model for each land cover cell devoted to construction. National
baseline TSS loads from construction sites were estimated to be 5.7 million metric tons per year. Option 4
is estimated to reduce this total loading to 4.9 million metric tons per year.
NWPCAM 2.1 uses this loading data to generate input and output files for thousands of Eutro-
Water Quality Analysis Simulation Program, Version 5 (WASP5) model runs. Eutro-WASP5 calculates
the decay and dispersion dynamics of the water quality indicators of WQI6 by modeling the mixing,
exchange, chemical, and biological processes occurring as the effluent flows through the surface-water
network. Many characteristics of the waterways and their environment contribute to the process models.
7.1.2 Valuation of Water Quality Changes
The correct benefit measure to compare with social costs is the change in producer and consumer
surplus ensuing from a change in environmental quality. One way to measure this quantity is to elicit
individuals' willingness to pay for the change. Most benefit assessments in the soil conservation context
take an alternative approach using the costs of avoiding the consequences of the environmental harm as a
proxy for willingness to pay. This was the approach taken for the benefits assessment of the C&D options
at proposal. For assessing the Final Action, however, EPA adopted an alternative survey-based approach.
To value predicted reductions in the pollution of rivers and streams, NWPCAM applies estimates
of Americans' willingness to pay for improvements in water quality. The foundation of these estimates is
a contingent valuation survey developed by Richard Carson and Robert Mitchell (Carson and Mitchell,
1993). This survey, which is national in scope, characterizes households' annual willingness to pay to
improve freshwater resources from baseline conditions to conditions that better enable beneficial uses
such as boating, fishing, and swimming. EPA uses the Carson and Mitchell research in two separate
analyses:
7-3
-------
First, EPA develops benefits based on the public's willingness to pay for improvements
in water quality that allow discrete movement to higher levels on a "ladder" of potential
water uses.
Second, EPA develops benefits based on a continuous water quality index, WQI6.
In the following section, we discuss these two methods in greater detail. The resulting economic benefit
estimates are discussed in Section 7.2, Benefits Assessment Results.
7.1.2.1 Water Quality Ladder Approach
EPA's first approach to relating surface-water conditions to the ability of a body of water to
support a particular designated use is based on a water quality ladder. The ability of a water body to
support beneficial uses at each step of the water quality ladder is defined by measures of DO, BOD, TSS,
and FEC. In order for a body of water to be considered boatable, fishable, or swimmable, it must satisfy
the minimum numeric criteria consistent with that use for all modeled parameters. These minimum
conditions are the same for all geographic areas. NWPCAM classifies each segment of each modeled
river or stream as swimmable, fishable, boatable, or non-supportive of any of these uses. The model
calculates the total stream-miles that support each designated use under each set of loadings conditions
(i.e., baseline conditions or conditions following implementation of the regulations).
The contingent valuation survey on which this analysis relies examined households' willingness
to pay to maintain or achieve specified levels of water quality in freshwater lakes, rivers, and streams
throughout the United States (Carson and Mitchell, 1993). Respondents were presented with the water
quality ladder and asked to state how much they would be willing to pay to maintain or achieve various
levels of water quality throughout the country.
Applying the willingness-to-pay estimates obtained from the Carson and Mitchell study to
analyze the benefits of regulations requires consideration of how households' willingness to pay for
water quality improvements is likely to vary with the extent and location of the resources affected.
People are likely to place greater value on improving the quality of water resources that are located
nearer to them because less time and expense is typically required to reach nearer resources; as a result,
7-4
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these resources generally provide lower cost and more frequent opportunities for recreation and
enjoyment. To reflect this consideration, the analysis separately calculates the benefits of in-state and out-
of-state improvements, assuming that households will allocate two-thirds of their willingness-to-pay
values to the improvement of in-state waters. In addition, the analysis takes into account the number of
stream-miles that improve from one use class to another by scaling household willingness to pay for a
given improvement by the proportion of total stream-miles that are projected to make the improvement.
7.1.2.2 Water Quality In dex Approach
A key limitation of the water quality ladder approach is that it only values changes in water
quality to the extent that they lead to changes in beneficial-use attainment. As a result, the approach may
attribute all of the benefits that occur at the thresholds between beneficial use categories to relatively
small changes in water quality indicators, while failing to capture the benefits of large changes that occur
without crossing the thresholds. In assessing a change in a large number of sources, changes that happen
to push a reach over the threshold will balance out those that do not, and the statistical outcome would be
a fair measure of willingness to pay. This rule, however, affects relatively few miles of water ways. The
limited sample size opens the door for chance changes in a few places to drive the results higher or lower.
Furthermore, the use classification is determined by the worst individual water quality parameter. For
example, if TSS achieves the boatable criterion but fecal coliform does not, the reach would still be
classified as non-boatable. The water quality index approach is designed to address these concerns.
Under the water quality index approach, NWPCAM calculates WQI6. EPA relies on a
willingness-to-pay function derived by Carson and Mitchell using their survey results. This equation
specifies household willingness to pay for improved water quality as a function of WQI6, household
income, household participation in water-based recreation, and respondents' attitudes toward
environmental protection. EPA estimates changes in index values using NWPCAM and applies the
willingness-to-pay function to estimate benefits. Based on this approach, EPA is able to assess the value
of improvements in water quality along the continuous 0 to 100 point scale. As with the water quality
ladder approach, the calculation of benefits is developed by state and takes into account differences in
willingness to pay for local and non-local water quality improvements (i.e., it assumes households will
allocate two-thirds of their willingness to pay for improvements to in-state waters).
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Results of the two monetization analyses are presented in Section 7.2. See the Environmental and
Economic Benefit Analysis for the concentrated animal feeding operations ELG for a more detailed
description of the two valuation approaches and their application (U.S. EPA, 2002, Section 4.6).
7.1.3 Nonqualified Categories of Benefits
Commenters on the proposed C&D regulation cited a number of categories of benefits that were
not included in the assessment of the rule. Inadequate data and modeling constraints prevented
quantification or monetization of any categories beyond the sediment effects considered in the NWPCAM
analysis discussed above. Nevertheless, other effects of the Final Action will generate benefits to society.
To organize its discussion of non-quantified benefit categories, EPA considers the path stormwater,
sediment, and related pollutants take from a building site to their final deposition. Along this path, excess
sediment and water creates costs to society in terms of increased maintenance costs, disamenities, and
outright damage. Table 7-1 summarizes the ways in which practices required by this regulation may
address categories of social impacts from fugitive sediment. The depth of analysis column indicates
whether the effect has been monetized through the NWPCAM process, quantified, or is discussed
qualitatively. Given the format of the Mitchell-Carson willingness-to-pay survey, it is difficult to know
what respondents were valuing in terms of specific environmental changes. Those identified as monetized
in Table 7-1 are categories that individuals may have considered in their responses to the survey.
7.2 BENEFITS ASSESSMENT RESULTS
EPA's purpose in considering Options 2 and 4 is to benefit the nation by improving water quality
and the environment. These benefits can be measured in economic terms and balanced against the costs of
implementing the incremental regulatory options. The preceding section described many categories of
7-6
-------
Table 7-1. Framework of Benefit Categories and Depth of Analysis
Built Environment
Create site amenities such as water features
Qualitative
Encourage development of "green" v. "brown" sites
Qualitative
Reduce street dredging costs
Qualitative
Reduce clogging of stormwater conveyance systems - ditches and culverts
Qualitative
Reduce impacts of construction on stormwater treatment practices
Qualitative
Temporary Sediment Deposition
Reduce overland erosion
Qualitative
Reduce effect of excess sediment on stream benthos and habitat
Quantified
Long-Term Sediment Deposition - Sediment Sinks
Reduce filling of wetlands and related habitat effects
Qualitative
Reduce loss of reservoir capacity
Qualitative
Reduce filling of navigational channels
Qualitative
Reduce sedimentation of shellfish beds
Qualitative
Suspended Sediment in the Water Column
Improve water quality for recreational use, particularly fishing
Monetized
Reduced costs to treat drinking water
Monetized
Reduced costs to treat cooling/process water
Monetized
Improve the aesthetic appearance of rivers and lakes
Monetized
Nutrients in the Water Column - Eutrophication
Reduce excess nutrients that cause lake and estuary habitat change
Qualitative
Improve water clarity and reduce associated loss in property values
Monetized
Reduce the frequency of anaerobic events and other fishery impacts
Qualitative
Hvdrological Changes
Reduce the need for stream restoration by maintaining natural flows
Qualitative
Reduce damage to bridges and culverts from peak flows
Qualitative
Reduce the impact on thermal conditions
Qualitative
Non-Use Benefits
Bequest, existence, and similar non-use aspects of water quality.
Monetized
7-7
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benefits that EPA believes would likely be generated by these options. It also described the
methodologies EPA developed to measure the benefits of the options. This chapter summarizes the results
of that analysis. The first section draws on the Environmental Assessment to show the changes in
sediment loads that indicate the environmental effects of the regulation. The second section describes the
results of applying these environmental changes to the NWPCAM benefit estimation model described in
Section 7.1.
7.2.1 Environmental Assessment Results
The Environmental Assessment used a model watershed approach to estimate TSS in the baseline
condition and under the alternative options. TSS is a measure indicating the level of sediment in the
water. Sediment is a good indicator of the regulation's effectiveness both for sedimentation and turbidity
effects and because nutrients, metals, and organic compounds enter the environment attached to sediment
particles. Table 7-2 shows the estimated difference between sediment tonnage released under the baseline
and that released under Option 4.
Option 4 reduces the nationwide total solids loads measured at the land cover cell level (i.e., at
the construction site) from 5.7 million metric tons per year to 4.9 million metric tons per year (Miles and
Bondelid, 2004). NWPCAM, the water quality model used for this assessment, is based on RF3Lite. Only
about 61 percent of TSS generated at construction sites is estimated to reach RF3Lite waters where water
quality benefits are measured. The option would generate a 15 percent reduction in the TSS load
generated by construction activities. See the Technical Development Document (EPA, 2004) for a more
extensive explanation of how the changes in loads were derived.
Table 7-2. Benefit Assessment Summary
Option
Land Cover Cell Load
(thousand metric tons/year)
Reach File 3 Lite Load
(thousand metric tons/year)
Reduction from Baseline
3 (Baseline)
5,705
3,454
—
4
4,851
2,938
14.9%
Source: Miles and Bondelid, 2003.
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7.2.2 Benefits Assessment Results
As discussed in Section 7.1, the sediment loadings drive the NWPCAM/Mitchell-Carson benefit
analysis. Table 7-3 shows the monetized benefit estimates using the water quality ladder and water quality
index approaches. These figures represent the present value of benefits of Option 4 derived from one
year's construction activity. As construction sites are quite short-lived, all of the benefits occur within one
year so discounting for the time value of money is moot. This formulation places the benefits in the same
terms as the costs developed in Chapter Five.
Table 7-3. Benefit Assessment Summary—Differences from Baseline
Water Quality
Ladder Category
Water Quality Ladder
Approach
($ Million, 2000)
Water Quality Index
Category
Water Quality Index
Approach
($ Million, 2000)
Boatable
$ 8.05
<26
$0.03
Fishable
$ 14.83
26-70
$7.34
Swimmable
$4.11
>70
$7.10
Total
$ 26.99
Total
$ 14.47
Source: Miles and Bondelid, 2004.
While the water quality index approach includes improvements in many more miles of waterways
(9,303 miles) than the water quality ladder approach (803 miles), the improvements generate a smaller
total value. Each change in water quality ladder category captures all of the value of the shift from one
category to another. Each improvement evaluated under the water quality index generates only a small
increment in willingness to pay.
As discussed in Section 7.1, these benefit estimates represent only the fraction of total benefits
that can be monetized. Many other results of the regulation will also improve social welfare but could not
be reasonably quantified from the available information.
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7.3 REFERENCES
Carson, R.T. and R.C. Mitchell. 1993. The value of clean water: the public's willingness to pay for
boatable, fishable, and swimmable quality water. Water Resources Research 29(7):2445-2454.
July.
McClelland, Nina I. 1974. Water Quality Index Application in the Kansas River Basin Prepared for the
U.S. Environmental Protection Agency - Region 7. (EPA-907/9-74-001).
Miles, Amy and Tim Bondelid. 2004. Estimation of National Economic Benefits Using the National
Water Pollution Control Assessment Model to Evaluate Regulatory Option for the Construction
and Land Development Industry. Research Triangle Park, NC: RTI International.
U.S. EPA. 2004. Development Document for the Effluent Guidelines for the Construction and
Development Point Source Category. Washington, DC: U.S. Environmental Protection Agency,
EPA-821 -B-04-001.
U.S. EPA. 2002. Environmental and Economic Benefit Analysis of Final Revisions to the National
Pollutant Discharge Elimination System Regulations and Effluent Guidelines for Concentrated
Animal Feeding Operations. Washington, DC: U.S. Environmental Protection Agency, EPA-821-
R-03-003.
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CHAPTER EIGHT
COSTS AND BENEFITS OF THE REGULATORY OPTIONS
8.1 INTRODUCTION
This chapter addresses the net social costs of the regulatory options considered. It brings together
the cost results described in Chapters Five and the benefits results presented in Chapter Seven to directly
compare the estimated costs and benefits of the options in accordance with Executive Order 12866 and
other administrative regulations.
All costs and benefits in this chapter are on an annual basis. The economic analysis describes a
typical year's impacts after implementation of any one of the options considered. When flows of costs
and benefits vary through time, it is common practice to calculate the net present value of each series of
flows and then compare the annual payments that would be necessary to amortize that value. For
example, when new regulation requires investment in capital equipment, there may be a large initial cost
to retrofit plants, and smaller maintenance costs in later years. Benefits, on the other hand, do not begin
to accrue for several years after implementation. To compare the costs and benefits, their net present
values are placed on an annual basis (i.e. annualized). However, when flows are constant and the same
discount rate is used to calculate the net present value as the amortization, the annualized value is the
same as the annual value. The costs and benefits described in this report, therefore, represent typical
annual values for costs and benefits and so are constant throughout the evaluation period. Thus, all years
are considered the same and annualization is unnecessary.
Section 8.2 describes the direct social costs of the various options, while Section 8.3 describes the
indirect effects of these options. Section 8.4 compares these costs with the benefits shown in Chapter
Seven.
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8.2
SOCIAL COSTS OF THE REGULATORY OPTIONS
8.2.1 Direct Social Costs
Direct social costs are the real resource opportunity costs to the private sector and governments of
implementing a regulation. The largest component of social cost is the cost to firms to comply with the
CGP provisions under Options 2 and 4. Installation of improved ESC management is a direct cost to
construction firms. Firms also bear increased design and operation and maintenance (O&M) costs of
improved ESCs. Governments at the federal, state, and municipal level would have roles in implementing
these options. These public resources spent by government entities might have been used for other
purposes and so represent a direct social cost. Under Options 1 and 2, firms would bear the costs of
inspection and self-certification. Each of these direct cost categories was quantified in Chapter Five and
is briefly discussed below.
8.2.1.1 Complian ce Costs
Implementation of any of the incremental regulatory options requires firms to devote real
resources, which might have been used for other purposes, to compliance. EPA estimated design,
installation, certification, and inspection costs per acre for the baseline and each regulatory option in
Chapter Five. All figures are adjusted to constant 2000 dollars using the Engineering News-Record
Construction Cost Index (ENR CCI) to represent the real private opportunity cost. These costs were
shown in Chapter Five, Table 5-4.
The ESCs in the incremental regulatory options do not depart significantly from current practices,
so several possible sources of social dislocation do not apply to this action. The basic operations of
construction would change little from existing practices. Potential changes in the inputs or production
processes are minimal. No radically new technology is considered that would require a substantial
learning period to operate or essentially change the production process, nor would the options generate
new waste products that might raise issues for disposal, sale, or reuse.
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8.2.1.2 Government Regulatory Costs
Codification of the CGP (Options 2 and 4) is estimated to require only a few hours of activity at
the federal, state, and local levels of government. Administration, in most instances, is likely to be
conducted at the state or local levels, though some oversight is likely to remain with EPA. These
activities impose opportunity costs as they draw resources from other government functions. EPA
estimates that each state requires approximately 200 labor hours to codify the CGP. To a large extent, the
options utilize administrative and enforcement institutions established by prior zoning, building code, and
stormwater regulation. EPA estimates that this one-time activity costs $0.24 million per year for five
years as states revise their permitting language and programs.
In addition, government entities conduct many projects that would be subject to the options
considered. Approximately 24.7 percent of the value of construction put in place would be incurred by
government entities. Federal projects account for 10.1 percent, state projects for 8.5 percent, and local
projects for 6.1 percent. Much of this expenditure is for maintenance of existing structures and so does
not entail new ground disturbance.
8.2.2 Social Welfare Losses
Social welfare losses occur when compliance costs result in higher prices for the goods in
question. Individuals gain utility from products when the market price is lower than the value they derive
from the product. This difference between value and price is termed "consumer surplus." Producers also
gain a surplus, or profit, when they can sell a product for more than the cost of production. The
incremental regulatory options are likely to affect new construction prices and so shift the market supply
function. Market models for each sector estimate the transfer of surplus from consumers to producers as
buyers pay more to builders for the added stormwater facilities. In addition, the higher price would
discourage some buyers, so the number of homes or buildings that might be sold will fall slightly. Such
reductions in sales result in losses of both consumer and producer surplus without any offsetting gain to
the economy, and so are termed "deadweight loss." The C&D/PEqMMS estimates these surplus changes
based on linear supply and demand curves with elasticities taken from the literature.
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Consumer and producer surplus losses were reported in Chapter Five, Table 5-19, as the gross
loss attributable to each option considered and include the deadweight loss. Although lost as profits, much
of the producer surplus figure is spent within the industry to comply with the new regulations. Similarly,
most of the consumer surplus loss is spent in the construction industry as consumers absorb the "passed
on" costs of compliance with the regulations. The loss in consumers' utility becomes spending for
improved stormwater management, but the overall welfare within the economy is unchanged. Only the
deadweight loss, estimated at $44,000 for Option 1, $965,000 for Option 2, and $647,000 for Option 4, is
completely lost to society.
8.2.3 Transitional Effects
The local impacts of firm closures and unemployment called by new regulations are generally not
considered a social impact issue, since, in general, the effects are transitory. The employees shift to other
jobs, and the capital invested in the plant shifts to other uses. There is a small social loss in job search
costs and unemployment time; however, when workers are specialized or unable to adapt to new labor
market conditions, they might be permanently unemployed, which would result in a loss of social welfare.
Construction is a highly flexible industry. It is normal practice for employees and firms to move
from job to job applying their individual skills to the task at hand. Job search costs and shifting
investments are standard elements of the industry.
8.3 INDIRECT EFFECTS
Beyond shifting the market supply for the regulated commodity, the incremental regulatory
options could affect the structure of the industry, change labor or capital productivity or discourage
innovation. These effects would have wider impacts on society as they ripple through related markets and
industries. EPA determined that none of the options have much possibility of causing indirect social
welfare effects through these mechanisms.
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No substantial changes in market structure are anticipated from any of EPA's options. While
some forms of regulation might result in advantages to large firms or encourage vertical integration, these
options build on existing practices of design and subcontracting of expertise already common in the
industry.
The incremental regulatory options are expected to have little effect on labor or capital
productivity. The options may require firms to employ more workers without increasing output (e.g., to
maintain silt fencing), but this opportunity cost is captured in the installation, operating, and maintenance
cost. No major changes in productivity are expected. Nor are these options expected to have major
effects on research, innovation, or investment toward future technological development of the industry.
EPA expects that other costs to society not specifically addressed by the analyses presented in this report
would be modest.
8.4
COMPARISON OF ESTIMATED COSTS AND BENEFITS
Chapter Seven described the results of the environmental assessment and benefit monetization.
All of the benefits estimated represent incremental social benefits from the baseline case. Table 8-1
compares the sum of social costs discussed above with the benefits shown in Chapter Seven. Anticipated
social costs are greater than the monetized benefits. Chapter Seven discusses several other classes of
benefits that could not be quantified yet provide real social benefits. These included increased utility
from water amenities, reduced costs of infrastructure and water conveyance maintenance, and
preservation of wetlands.
Table 8-1. Social Costs ant
Benefits (Millions of dollars per year [year 2000 dollarsl)
Option
Installation,
Design, and
Permitting
Operation and
Maintenance
Government
Costs
Deadweight
Loss
Total
Social
Costs
Total
Social
Benefits3
1
$264.1
$0.0
$0.0
$0.0
$264.1
—
2
$508.4
$47.3
$0.3
$1.0
$556.9
$14.5
3
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
4
$312.6
$47.3
$0.3
$0.6
$360.8
$14.5
a Benefits were only monetized for Option 4 using NWPCAM. As Option 4 is a subset of Option 2, benefits from
Option 2 must equal or exceed the benefits from Option 4.
Source: EPA estimates based on the methodologies presented in Chapter Four and Chapter Seven.
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CHAPTER NINE
UNFUNDED MANDATES REFORM ACT
9.1 INTRODUCTION
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), P.L. 104-4, provides for
agencies to assess the effects of their regulatory actions on state, local, and tribal governments and the
private sector. Under section 202 of UMRA, EPA generally prepares a written statement, including a
cost-benefit analysis, for proposed and final rules with "federal mandates" that may result in expenditures
to state, local, and tribal governments, in the aggregate, or to the private sector, of $100 million or more
in any one year.
Before promulgating an EPA rule for which a written statement is needed, section 205 of UMRA
directs EPA to identify and consider a reasonable number of regulatory alternatives and adopt the least
costly, most cost-effective or least burdensome alternative that achieves the objectives of the rule. The
provisions of section 205 do not apply when they are inconsistent with applicable law. Moreover, section
205 allows EPA to adopt an alternative other than the least costly, most cost-effective or least
burdensome alternative if the Administrator publishes with the Final Rule an explanation of why that
alternative was not adopted.
Before EPA establishes any regulatory requirements that might significantly or uniquely affect
small governments, including tribal governments, it is to develop a small government agency plan
pursuant to section 203 of UMRA. The purpose of the plan is to provide for notifying potentially affected
small governments, thus enabling officials of affected small governments to have meaningful and timely
input in the development of EPA regulatory proposals with significant federal intergovernmental
mandates, and informing, educating, and advising small governments on compliance with the regulatory
requirements.
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9.2 ANALYSIS AND RESULTS
EPA has determined that some of the regulatory options considered might contain a federal
mandate that could result in expenditures of $100 million or more by state, local, or tribal governments in
the aggregate, or to the private sector in any one year. Accordingly, EPA has prepared the written
statement in accordance with section 202 of UMRA. This and previous sections of the EA include this
statement: Chapter Five of the EA identifies costs and impacts (burdens) on construction firms and
governments that would be subject to the options considered, as well as other market affects. Chapter
Seven presents estimated monetary benefits that might accrue under the options considered, in accordance
with UMRA. This section investigates impacts specifically on small governmental units.
To determine impacts on small governmental units, EPA allocated compliance costs to small
governmental units based on the value of construction work done and population. First, EPA determined
the percentage of compliance costs that might ultimately fall on government agencies. The value of
construction work done by government agencies (federal, state, and local) is approximately 24.7 percent
of the total value of construction work done, with the remainder performed by private entities (Census,
2000b). EPA applied the 24.7 percent factor to the total national compliance costs for each option to
determine the portion of costs accruing to government entities. The estimated total cost of the Final
Action if Option 1 is chosen is approximately $264.1 million.1 Based on the value of construction work
done, approximately 24.7 percent of this cost, or $65.2 million, is estimated to be borne by public entities.
If Option 2 is chosen, the estimated total cost of the Final Action is $555.7 million, with public entities
incurring approximately $137.3 million of this total. If Option 4 is chosen, the estimated total cost of the
Final Action is $359.9 million, with public entities incurring approximately $88.9 million of this total.
EPA then used data on the funding of capital outlays for highway projects to determine the
portion of compliance costs accruing to each level of government (i.e., to federal, state, and local entities).
Based on these data, approximately 41 percent of government compliance costs is borne by the
1 Total compliance cost equals the installation, design, and permitting costs plus operation and
maintenance costs. See Chapter Five.
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federal government, 34 percent is borne by state governments, and the remaining 25 percent is borne by
local governments (FHWA, 2000).
EPA determined that the smallest unit of government potentially affected by the options
considered are at the sub-county (i.e., municipal or township) government level. Census data were used to
determine financial and other information (e.g., population) for local government entities (Census, 2000a,
and Census, 1999). This information was combined with data from several other sources to assess the
impacts of the options considered on small government entities; i.e., those serving populations of less
than 50,000 (5 USC 601[5]).
To determine the impacts on small local governments, EPA allocated costs based on the
population served by local jurisdictions with populations of less than 50,000. Approximately 83 percent
of the total U.S. population in 1996 (219 million out of 265 million) lived in areas governed by a
municipality or town/township.2 Of those served by these sub-county governments, approximately 43
percent (114 million) lived in areas served by municipal or town/township governments with populations
of less than 50,000 (Census, 1999). Therefore, EPA estimated that 43 percent of local government
compliance costs affect projects undertaken by small government entities.
EPA compared the local government share of compliance costs against several financial
indicators to determine the extent of the impacts on small governmental units. The indicators used were
total revenues, capital outlay, and capital outlay for construction only. In all cases, compliance costs were
less than 0.21 percent of the financial measure, indicating no significant impact on small governmental
units. The calculations are shown in Table 9-1.
2 The remaining portion of the total U.S. population (i.e., those not served by municipal or town/township
governments) might be served only by a county government, a special district government, or some other form of
local government not covered by the census report.
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Table 9-1. Impacts of Regulatory Option Compliance Costs on Government Units
(millions, constant 2002 dollars)
Option 1
Option 2
Option 4
Government Component
Costs
As Percent of
Total Costs
Costs
Costs
Total Compliance Costs
$264.1
100.00%
$555.7
$359.9
Private Compliance Costs (75.3%)"
$198.9
75.30%
$418.4
$271.0
Public Compliance Costs (24.7%)a
$65.2
24.70%
$137.3
$88.9
Federal (41.07%)b
$26.8
10.14%
$56.3
$36.5
State (34.29%)b
$22.4
8.47%
$47.1
$30.5
Local (24.64%)b
$16.1
6.09%
$33.8
$21.9
Small Government Entities (43.11%)c
$6.9
2.62%
$14.6
$9.4
Total Revenues: Small Government
$103,641
$103,641
$103,641
Compliance Costs as % of Total Revenues
0.01%
0.01%
0.01%
Capital Outlay: Small Government
$11,262
$11,262
$11,262
Compliance Costs as % of Total
Capital Outlay
0.06%
0.13%
0.08%
Construction Outlay Only:
Small Government
$6,903
$6,903
$6,903
Compliance Costs as % of Small
Government Construction Outlay
0.10%
0.21%
0.14%
a Based on value of construction work done by government entity. 1997 Census of Construction.
b Based on the percent of capital outlay for highways funded by governmental unit. 1999 FHWA Conditions and
Performance Report to Congress.
c Based on the percent of U..S. population living in municipalities or towns/townships serving <50,000.
Note: Approximately 83 percent of the U.S. population (or 219,004,000) lives in an area governed by a municipality
or a town/township. The remaining population might be served only by a county government, a special district
government, or other governmental organization not covered here. Of the 219 million served by these subcounty
governments, approximately 114,347,000 (or 43 percent) are served by municipal or town/township governments
with populations of <50,000.
Sources: 1997 Census of Governments: Compendium of Government Finances; 1997 Census of Governments:
Government Organization; 1999 Status of the Nation's Highways, Bridges, and Transit: Conditions and
Performance, Report to Congress; 1997 Census of Construction.
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9.3 REFERENCES
FHWA 2000. Status of the Nation's Highways, Bridges, and Transit: Conditions and Performance.
Report to Congress. Washington, DC: Federal Highway Administration. May.
U.S. Census Bureau. 1999. 1997 Census of Governments: Government Organization. Volume 1. August.
U.S. Census Bureau. 2000a. 1997 Census of Governments: Compendium of Government Finances.
Volume 4. December.
U.S. Census Bureau. 2000b. 1997 Economic Census: Construction—Industry Summary.
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