1 The Economic Impact of Proposed Effluent Treatment Options for Production of Trout Oncorhynchus mykiss in Flow through Tanks.

Carole R. Engle and Steve Pomerleau Aquaculture/ Fisheries Center, Mail Slot 4912, University of Arkansas at Pine Bluff, 1200 North University Drive, Pine Bluff, AR 71601.

Gary Fornshell University of Idaho Extension, 246 3rd Ave E. Twin Falls, ID 83301 Jeffrey M. Hinshaw Department of Zoology, North Carolina State University, 455 Research Drive, Fletcher, NC 28732.

Debra Sloan North Carolina Department of Agriculture and Consumer Services P. O. Box 1475, Franklin, NC 28744.

Skip Thompson North Carolina Cooperative Extension P. O. Box 308 Waynesville, NC 28786 2 Issue Outline Code: 1 Legal Authority/ Background Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 1 INTRODUCTION According to the 1998 Census of Aquaculture ( NASS 2000), the U. S. trout industry consists of 561 farming operations located in 42 states. Most of the production is in flow through concrete tanks; however, earthen ponds continue to be used by some farmers. The majority of the farms are small, family operated businesses with average sales per farm of $ 129,473 nationally. However, the largest 20% of trout farming operations ( 108) account for over 85% of total sales. Idaho is the leading trout producing state with 70 75% of domestic production. North Carolina ranks second in the United States with sales that accounted for 8% and 10% of total U. S production and sales, respectively ( NASS, 2003). Twenty one ( 37%) of the 57 commercial trout farms in production in North Carolina in 2002 were located in Transylvania County. Approximately 816,000 kg of trout were produced in Transylvania County in 2002.

The United States Environmental Protection Agency ( EPA) began to review aquaculture for consideration in the Effluent Limitation Guidelines ( ELG) program in 1998. The ELG rulemaking effort develops technology based standards that are economically achievable. EPA outlined five potential regulatory options for flow through systems in the proposal that was published in 2002 ( USEPA 2002) ( Table 1). Option 1 included quiescent zones, sedimentation basins, best management practices ( BMP) plans, and compliance monitoring for total suspended solids ( TSS). Option 2 included a drug and chemical BMP plan in addition to the other treatment options in Option 1. Option 3 included solids polishing with micro screen filters and weekly compliance monitoring for total phosphorus in addition to the Option 2 treatments. EPA proposed Options 1, 2 and 3 for large flow through facilities that have an annual production above 215,909 kg ( 475,000 lb) of trout, but proposed only Option 1 for medium facilities with an annual production between 45,455 kg/ yr ( 100,000 lb/ yr) and 215,909 kg/ yr ( 475,000 lb/ yr). No treatment options were proposed for facilities producing less than 45,455 kg/ yr ( 100,000 lb/ yr) because it was clear early in the process that these farm sizes could not afford treatment of effluents.

EPA followed with publication of a Notice of Data Availability ( NODA) on December 29, 2003. In the NODA, two additional options ( Options A and B) were included. Options A and B restructured the combinations previously divided into Options 1, 2, and 3 and added BMP plans on escape prevention in addition to INAD reporting requirements.

Quiescent zones ( considered in regulatory Options 1 and A) are settling areas for solids in the lower portion of tanks. Cultured fish are excluded from quiescent zones with a screen in the upper side of the zone to prevent disturbing settled solids. Quiescent zones may be cleaned with a 3 vacuum hose attached to the drain. Vacuumed solids are then transferred to a sedimentation basin. Suspended solids settle on the bottom of the sedimentation basins. Accumulated solids are removed periodically from the settling basins with a vacuum tank or a front end loader and disposed of through land application. Solids control BMP plans ( considered under Options 1, 2, 3, and B) would require the farm manager to develop a BMP plan that presents a series of sitespecific activities to control the release of solids. These activities include specification of feeding methods, description of proper pollution control technologies and equipment, proper operation and maintenance of equipment, a cleaning schedule, training of personnel, and record keeping. Compliance monitoring for TSS requires labor and material for weekly monitoring. An 8 h composite water sample would be collected and delivered to a laboratory for analysis. A drug and chemical BMP plan was proposed for Options 2, 3, and A to document the use of drugs and chemicals. Each farm manager would be required to develop a BMP plan that presents a series of site specific activities to control the inadvertent spillage or release of drugs and chemicals.

Microscreen filters were included in Options 3 and B to achieve additional solids removal with wastewater treatment technology. The microscreen filters would be used to reduce solids discharged from sedimentation basin effluents. Filters would consist of a fine screen ( 60 90 microns) fitted to a rotating drum and equipped with an automatic backwash system that removes solids collected.

Response: Not a comment on the rule. Excerpt contains a description of the industry based on the USDA Census of Aquaculture, the importance of Idaho and North Carolina operations as the largest and second largest raisers of trout, and a review of the options considered by EPA at proposal and Notice of Data Availability.

Issue Outline Code: 1 Legal Authority/ Background Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 2 While there have been a number of studies on effluent treatments in aquaculture, few studies have focused on the economic feasibility of the specific effluent treatment options proposed by EPA. Engle and Valderrama ( 2003) showed that settling basins were not economically feasible for use in pond aquaculture. Wui and Engle ( 2004), using a mixed integer linear programming model, found that the only feasible treatment alternatives for hybrid striped bass effluents were not draining and not flushing ponds. However, the production risks of not flushing or draining hybrid striped bass ponds have not been well documented. Engle and Valderrama ( in review) showed, 4 with a mathematical programming model, that implementation of BMPs on shrimp farms can result in changes in net revenue. The net revenue changes were both positive and negative and resulted from changes in production practices, cash flow, and increased costs of financing shrimp production.

Response: Not a comment on the rule because the studies concern pond systems which are not within the scope of the rule.

Issue Outline Code: 13B Methodological Overview Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 3 Analyses of both the farm level and local economic impacts are important to evaluate the overall effect of imposing additional treatment technologies on aquaculture farms.

Response: EPA concurs and conducted an economic impact analysis that examined the effects of additional pollution control costs on enterprises, facilities, and companies, direct impacts on employment and productions, associated local impacts, such as the change in unemployment rate, farm financial health, and borrowing capacity. See response to comment 70245 5 for details.

Issue Outline Code: 1 Legal Authority/ Background Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 4 Kaliba et al. ( 2004) developed an IMPLAN analysis of the economic impact of the trout industry. The trout industry in Transylvania County, North Carolina, generated about $ 9 million in economic output, created 201 jobs, generated $ 3 million in labor income, and $ 0.9 million in tax revenue in 2002. This economic activity is particularly important in a county like Transylvania County, where economic prosperity depends upon locally available jobs and diversification of economic activities. 5 Response: Not a comment on the rule. Excerpt describes analysis of the economic importance of the trout industry to Transylvania County, North Carolina. EPA concurs that aquaculture may play an important role in local economics and, accordingly, has conducted an economic impact of the rule. See response to comment 70249 5 for details.

Issue Outline Code: 1 Legal Authority/ Background Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 5 The objective of this study was to evaluate the economic feasibility of the proposed effluent treatment options for trout flow through systems. The analysis focused on trout farms in Idaho and North Carolina that produce more than 45,455 kg/ yr ( 100,000 lb/ yr).

Response: Not a comment on the rule. It is a statement that the study focuses on in scope facilities ( e. g., flow through systems with production > 100,000 lb/ yr.

Issue Outline Code: 1 Legal Authority/ Background Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 6 MATERIALS AND METHODS Surveys of trout farms in Transylvania County, North Carolina, and Idaho were conducted in 2003. Survey data were collected from 13 of the 21 farms ( 62%) in Transylvania County, NC. The questionnaire solicited information on resource inputs and production levels for 2002. These included trout marketing, sales, and variable costs. Variable cost data collected included: transportation costs, labor costs, chemical and oxygen costs, diseases and treatment costs, electricity, fuel and lubricant costs, stocking and feeding costs, waste management and effluent monitoring costs, repair and maintenance costs, and overhead costs. Items included in the 6 overhead cost were: telephone, farm insurance, legal, accounting, office supplies and consumables, interest on capital, land lease costs, and nets, boots, waders and other miscellaneous purchases. Similar production and financial information was also collected from eight trout farms in Idaho by personal interviews with the farm owner or manager.

Base farm scenarios were developed that included: 1) medium sized farm in North Carolina producing 68,182 kg/ yr ( 150,000 lb/ yr); 2) medium sized farm in Idaho ( 90,909 kg/ yr; 200,000 lb/ yr); and 3) large sized farm in Idaho ( 1,136,364 kg/ yr; 2,500,000 lb/ yr). These base scenarios were selected by choosing the most commonly observed farm sizes in the survey data within the production level categories for which USEPA proposed treatment options. Different management practices used in Idaho as opposed to North Carolina required development of separate base scenarios. No large farm scenario was analyzed for North Carolina because no farms operating in Transylvania County have production levels greater than 215,909 kg/ yr ( 475,000 lb/ yr).

Response: This is the first point of divergence between the Engle et al. and EPA economic analyses. Engle, et al develop three scenarios to represent 13 trout farms in North Carolina and 8 trout farms in Idaho from which they collected data. In contrast, the EPA methodology would have created 21 scenarios, one with facility specific data for each farm in the study. Where EPA has the ability to do so, the preferred approach, and the approach consistent with prior effluent guidelines rules, is to use facility specific costs, revenues, and pollution control costs as a more precise method of evaluating the impacts of pollution control options.

Issue Outline Code: 13B Methodological Overview Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 7 Enterprise budgeting techniques ( Kay and Edwards 1994) were used to evaluate the effect of imposing effluent treatment options proposed by USEPA on the trout farm size scenarios selected. Enterprise budgets were developed first without the proposed treatment options. Production characteristics, management practices, and prices from the survey results were used to develop estimates of annual costs and returns using standard budgeting techniques ( Kay and Edwards 1994). Costs associated with the treatment options proposed by EPA were added to the budgets and changes in net returns were then measured. Additional scenarios were developed to reflect both farm businesses with no land financing costs and those with land financing costs.

Response: This is a second point of divergence between the Engle et al. and the EPA studies. Engle et al. 7 mention that their study uses " standard budgeting techniques" to develop three model farms for analysis. The authors do not specify whether they choose a " representative" farm in each scenario and then use all parameters from those representative farms, whether they consistently use calculated average values for each parameter in the model farm, or whether the average values are modified slightly to generate a coherent set of costs and returns. ( The difference of the averages is not the same as the average of the differences, that is, the difference between the average total cost and the average total revenues need not match the average taken of the facility specific earnings.) In contrast, the EPA approach is to use facility specific matched sets of costs, revenues, and pollution control costs to evaluate impacts. EPA also notes that Engle et al. do not remove expected baseline closures prior to generating any values and/ or characterizing " representative" facilities. This assumption can lead to significant differences in results between EPA and Engle et al.

Early in the rulemaking process, EPA also examined and decided not to use an enterprise budget approach to evaluating impacts, see DCN 20153, ERG, 2001, " Lessons Learned from Sensitivity Analysis and Enterprise Budgets" and DCN 20189, ERG, 2001. " Enterprise Budgets and Survey Data: Aquatic Animal Production."

Issue Outline Code: 10 Option Costs Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 8 Both " low" and " high" cost scenarios were developed to account for the range of implementation costs resulting from variation in site specific conditions. For example, compliance monitoring of TSS can be accomplished either by hand or by purchasing an automatic composite sampler. Installation of quiescent zones may or may not result in reduced production depending upon tank configuration. Similarly, construction of offline settling ponds may require destruction of existing tanks if no additional level land is available. For Option 1, the low cost scenario included: solids control BMP plan, compliance monitoring of TSS done by automatic composite sampler, quiescent zones without negative effect on production, offline settling pond constructed without having to destroy tanks and emptied with a vacuum tank, and no additional land purchased for disposal of solids. The high cost scenarios for Option 1 included: solids control BMP plan, compliance monitoring of TSS done by hand, quiescent zones that proportionally reduce production, replacing existing tanks with offline settling ponds because no extra land was available, offline settling pond emptied with a front end loader, and additional land purchased for disposal of the solids. No site specific variation in costs was considered for Option 2 because no evidence for such variation was found. Thus, no distinction was made in the analysis of Option 2 for low or high cost variations. For Option 3, the low cost scenarios were based on EPA's cost 8 assumptions ( EPA 2002) while the high cost scenarios were based on comments of the Trout Subgroup of the Joint Subcommittee on Aquaculture's Aquaculture Effluents Task Force related to cost variations observed in the trout industry ( TSAETF 2003). Option A included primary settling, BMP plans for drugs and chemicals, and escape prevention, and reporting for INADS and extra label drug use. Option B included those items in A in addition to either a BMP plan for solids control or solids polishing with a microscreen filter. Both EPA and AETF estimates of costs associated with microscreens were included.

Response: [ Engineering response needed.]

A third point of divergence between the Engle et al. and EPA studies is the consideration of pollution control features already in place at a facility (" treatment in place"). Engle et al. assumes that the model facilities incur costs for all components of an option while EPA based its sitespecific cost estimates on the existing treatment in place at facilities that received a detailed questionnaire. EPA characterizes baseline conditions using existing compliance levels and treatment in place ( FR 68: 75068 75105 and FR67: 57872 57928). This approach is consistent with past effluent guidelines and EPA's Guidelines for Preparing Economic Analyses ( USEPA, Guidelines for Preparing Economic Analysis, EPA 240 R 00 003, September 2000, Section 5.3.2) and Office of Management and Budget ( OMB) guidelines. OMB guidelines state that "... the baseline should be the best assessment of the way the world would look absent the regulation ... it may be reasonable to forecast that the world absent the regulation will resemble the present." ( OMB. OMB Circular A 4, Regulatory Analysis, Appendix D in Informing Regulatory Decisions: 2003 Report to Congress on the Costs and Benefits of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities. 2003.). This means that if a facility already has option components in place by 2001 ( the most recent year in the detailed questionnaire), EPA does not assign costs for those components to the facility. For example, if a facility has primary settling ( a component that occurs in all options under consideration), it would not be expected to incur the costs for primary settling.) It should also be noted that the final rule focuses on BMPs and provides significant flexibility ( and lower costs) to facilities in meeting the requirements of the final rule.

Issue Outline Code: 13B Methodological Overview Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 9 Since production characteristics, costs, and prices vary through time and from farm to farm, a stochastic Monte Carlo simulation model was used to assess the effect of variations in various 1 Use of a particular brand name does not imply endorsement.

9 budget parameters on net returns. The enterprise budgets developed were based on typical farm values observed in the survey data. Crystal Ball ® 1 ( Decisioneering, Inc., Denver, Colorado), an add on program to Microsoft Excel, was used to substitute probability distributions for the single values used in the enterprise budget worksheets. Triangular distributions characterized by a most likely, a minimum, and a maximum value were used for most assumptions. The model generated stochastic fluctuations in selected variables and calculated the probability of achieving positive net returns. Simulations of 1,000 iterations per scenario were run.

Response: Methodological description, not a comment on the rule. EPA notes that Monte Carlo analysis traditionally is conducted with consideration of correlations among random parameters; it is not clear that efforts were made to reject/ accept potential for correlations. Failure to insert suggested correlations can lead to greater ranges of projected earnings. It is also not clear if the study relied on standard errors or standard errors of the mean results when presenting results.

Before the detailed questionnaire data were available, EPA also examined enterprise budgets and a sensitivity analysis approach based on parameter values and ranges supplied by the Joint Subcommittee on Aquaculture, Aquaculture Effluent Task Force, see DCN 20153, ERG, 2001, " Lessons Learned from Sensitivity Analysis and Enterprise Budgets" and DCN 20189, ERG, 2001. " Enterprise Budgets and Survey Data: Aquatic Animal Production."

Issue Outline Code: 13B Methodological Overview Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 10 The enterprise budgets were used to construct mixed integer programming models for North Carolina farms with capacity to produce 68,182 kg/ yr ( 150,000 lb/ yr) and for Idaho farms with capacities of both 90,909 kg/ yr ( 200,000 lb/ yr) and 1,136,364 kg/ yr ( 2,500,000 lb/ yr). The objective function of the model was to maximize net returns above variable costs. Constraints included supply and demand balances for foodsize trout and for purchased inputs. The North Carolina model included production and sales activities for both food trout and recreational trout sales. Resource availability constraints and non negativity constraints were included. Effluent treatment option constraints were integer variables including each component of the proposed options. The model was formulated by aggregating all equations so that the model maximizes net returns above variable costs after imposing the various treatment options subject to constraints including integer variable constraints. 10 Response: Description of methodology, not a comment on the rule.

Issue Outline Code: 13A Description of the Industry Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 11 RESULTS AND DISCUSSION The response rate of the structured questionnaire in Transylvania County in North Carolina was 81%. Farms had a median production level of 66,000 kg/ yr, ranging from 1,000 204,500 kg/ yr ( Table 2). Median market price of food trout was $ 2.42/ kg ($ 1.10/ lb). Major expenses on trout farms were the variable costs of fingerlings, feed, labor, management, and the fixed depreciation costs. Fingerlings cost $ 0.07 each, but ranged from $ 0.07$ 0.17 depending upon the size purchased. Feed conversion ratios ranged from 1.04 1.55 with a median of 1.20. Feed prices ranged from $ 0.66$ 0.79/ kg with a median price of $ 0.70/ kg. Depreciation costs ranged from $ 6,000$ 18,000/ farm.

Farmers interviewed in Idaho had a median production of 1.2 million kg/ yr, ranging from 27,000 kg/ yr to 1.2 million kg/ yr. Idaho trout farmers purchased eggs instead of fingerlings at a median cost of $ 0.015 each. Feed conversion ratios were similar, but Idaho feed costs were slightly lower than in North Carolina. Depreciation costs per farm increased with the larger farm sizes in Idaho.

Table 2. Selected results of surveys of trout farms in Transylvania County, North Carolina and Idaho. Item Unit North Carolina ( 68,182 kg/ yr farm) Idaho ( 90,909 kg/ yr farm) Median Range Median Range Farm size kg/ yr 66,000 1,000 204,500 1,200,000 27,000 1,136,364 Market price food trout $/ kg 2.42 2.33 3.04 1.76 1.54 1.83 Seed costa $ each 0.07 0.07 0.17 0.015 0.015 0.02 Feed FCRb 1.20 1.04 1.55 1.20 1.20 1.55 Price $/ kg 0.70 0.66 0.79 0.64 0.62 0.66 Labor h 1,680 1,470 2,100 1,400 1,400 2,400 Management h 720 630 1,800 600 600 3,600 11 Depreciation $ 12,000 6,000 18,000 16,000 8,000 24,000 aNorth Carolina farmers mostly purchased fingerlings while Idaho farmers purchased eggs. bAdapted from EPA's detailed survey aggregated values. cLabor costs include both paid labor and unpaid ( family) labor.

Response: EPA compared the data sets used by Engle et alia to the EPA in scope population ( i. e., > 100,000 lb/ yr). Based on the information presented in Engle et alia, Table 2, EPA developed Table 1 ( below) and made the following observations. For North Carolina, the smallest farm in the survey produces 1,000 kg/ yr. This farm is so small that it does not qualify to be a CAAP and is not within the scope of the rule. By the median value, we have a farm that is large enough to be within the scope of the rule. At a minimum, one of 13 or 7.7 percent of the NC farms are out of scope of the rule. At most, six of 13 or nearly half the sample might be outside the scope of the rule. It is therefore not clear how many facilities are used in the analysis.

The Idaho data set has eight observations. The smallest farm produces 27,000 kg/ yr so, although it is a CAAP, it is not within the scope of the rule. It is not clear how the median value, reported as 1.2 million kg/ yr, can exceed the maximum value reported as 1.1 million kg/ yr [ sic]. The average of observation # 4 and observation # 5 is 1.2 million kg/ yr, so the most likely situation is that both observations are close to 1.2 million kg/ yr. So at least one and possibly three observations are outside the scope of the rule ( i. e., between 12.5 and 37.5 percent of the population). This also implies that the medium sized Idaho enterprise budget is based on at least one observation outside the scope of the rule. 12 Table 1 Farm Sizes in Engle et alia, 2004 Farm Size ( kg)

Observation North Carolina Idaho 1 1,000 27,000 2 3 4 1,200,000 5 6 7 66,000 8 1,136,364 9 10 11 12 13 204,500 Source: Engle, et alia, Table 2.

EPA met with the principal investigator of the study, Professor Carole Engle, on April 30. At the meeting, Prof. Engle first clarified that the study does not combine data and results across all facilities, but differentiates between operations with less than and greater than 100,000 lbs/ year of production. Although the Engle paper's Table 2 reports the survey data across all facilities surveyed, she stated that the models' production size categories are analyzed separately.

Issue Outline Code: 13A Description of the Industry Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 12 Enterprise Budget and Risk Analysis 13 The enterprise budget analysis showed that gross revenue for similar sizes of production units is lower in Idaho than in North Carolina ( Table 3). Differences in products, target markets, market channels, and positioning of trout products in the respective states result in lower prices received by farmers in Idaho as compared to those received by trout farmers in North Carolina.

The greatest expense in trout farming is feed ( Table 4). Feed represented 40% of Total Variable Costs ( TVC) and 36% of Total Costs ( TC) of trout farming in North Carolina. On the larger trout farm sizes modeled for Idaho, feed represented from 52 57% of TVC and from 44 50% of TC. Labor was the next largest cost on the smaller farm sizes ( 15% of TC in NC and 11% of TC on the medium farm in Idaho). Depreciation was the second greatest cost on the largest farm size in Idaho. For the NC farm, management ( 12% of TC), fingerlings ( 8% of TC), depreciation ( 8% of TC), interest on operating capital ( 7% of TC), and oxygen ( 6% of TC) followed. All representative farms modeled showed positive net returns after accounting for both cash and non cash expenses ( Table 3). Overall net returns were highest on the larger farm in Idaho and were followed by the NC farm. The lowest returns modeled were those of the medium sized Idaho farm.

Breakeven prices above total costs ( BEP Total Costs) ranged from $ 1.31/ kg  $ 2.05/ kg ($ 0.69 $ 1.04/ lb), with the NC farm model exhibiting the highest BEP Total Cost ( Table 3). However, given the higher market prices, the higher BEP Total Cost does not reflect lower profitability.

Response: Most of the comment is a description of the enterprise budgets developed for the analysis, rather than a comment on the rule. One methodological difference between the Engle et alia study and the EPA analysis is that the former includes non cash costs, such as depreciation, as the primary method of calculating earnings. That is, the analysis is done on a net income basis. In contrast, EPA examines cash inflows and outflows and calculates earnings as cash flow. The EPA analysis also considered net income as a sensitivity analysis. For a more detailed discussion regarding cash flow, net income, and depreciation, see EEBA, Economic and Environmental Benefits Analysis of the Final Effluent Limitations Guidelines and Standards for the Concentrated Aquatic Animal Production Industry, EPA..., DCN 63010, Appendix A.

Issue Outline Code: 13B Methodological Overview Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 13 The enterprise budgets included all unpaid family labor and management. The majority of medium sized farms are family operated businesses in which the majority of labor and 14 management is from unpaid family members. The value of this resource is especially large in proportion to overall costs and revenue on smaller farm sizes. Therefore, when a dollar value is assigned to the number of hours worked by the family members, net returns from the enterprise are near the breakeven point.

Response:

A fourth point of divergence between the Engle et alia and EPA analyses is the treatment of unpaid labor and management. First, the comment that " The majority of medium sized farms are family operated businesses in which the majority of labor and management is from unpaid family members" is not reflective of the facilities that received detailed questionnaires and are within the scope of the rule ( i. e., production > 100,000 lb/ yr). Of the 110 commercial facilities estimated to be within the scope of the rule ( generated from EPA's detailed questionnaire data), only 3 reported unpaid labor and management. The use of unpaid labor and management is more common at facilities that produce between 20,000 to 100,000 lb/ yr. The statement is consistent, however, if the population studied in the Engle et alia analysis contains a substantial proportion of facilities that produce less than 100,000 lb/ yr and are not within the scope of the rule, see response to comment AAPNODA 847 11.

EPA examined the effect of imputing a range of costs for labor and management to the three facilities reporting unpaid labor in the EPA questionnaire and found that it did not have an effect on the impacts estimated as a result of the rule. That is, either the facility was viable in the baseline and remained viable after the imposition of incremental pollution control costs or the facility was not viable in the baseline. The analysis is in the rulemaking record. When estimating the costs of pollution control, EPA includes labor costs for each facility in the analysis even if it reported unpaid labor and management.

Unpaid family labor and management is " unpaid" only with respect to the income statement. Distributions from the business to cover family living and other personal expenses are generally referred to as " family living withdrawals" or " owner withdrawals." These withdrawals are shown in the statement of owner equity in the balance sheet and not the income statement. EPA examines potential changes in balance sheet ratios as a result of additional pollution control costs ( see " financial health" analysis in the EEBA, Economic and Environmental Benefits Analysis of the Final Effluent Limitations Guidelines and Standards for the Concentrated Aquatic Animal Production Industry, EPA..., DCN 63010).

EPA is following the recommendation of the Farm Financial Standards Council ( FFSC) in its analysis. FFSC specifically recommends that a " charge for unpaid family labor and management should not be included on the income statement..." ( DCN 20095).

Finally, how the different analyses address unpaid labor and management is related to the difference in facility specific and model facility approaches. As mentioned in responses to AAPNODA 847 6, EPA uses a facility specific approach and, following FFSC guidance, does not 15 impute a labor cost in the rare case the unpaid labor and management is reported. The Engle et alia study does not describe how many data points were adjusted for unpaid labor and management or how the representative labor rate was chosen. The only statement provided is that after the adjustment " net returns from the enterprise are near the breakeven point." That is, in the Engle et alia analysis, the model enterprises are very marginal prior to any additional costs. This marginality is, as noted in response to comment AAPNODA 847 7, is potentially due to the inclusion of baseline closure facilities. If baseline closures are excluded, marginality is reduced, and results show greater capacity to incur compliance costs.

Issue Outline Code: 10 Compliance Costs Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 14 The treatment options proposed by EPA require a combination of labor, management, capital ( charged as annual depreciation), and operating and maintenance ( O and M) costs ( Table 5). Quiescent zones require land and capital costs associated with the structure and vacuum components for removal of sediments. Likewise, an offline settling pond requires capital for the structure, land for field application and O and M costs. The offline settling pond will require either a front end loader or a vacuum tank for proper operation. The drug and chemical BMP requires only labor and management time with a much higher time requirement the first year. The solids control BMP plan requires only labor and management time with a greater quantity of time required the first year. Compliance monitoring also requires labor and management if the monitoring is done by hand. However, if a composite sampler is purchased, additional capital cost is incurred. Solids polishing with a microscreen entails a capital cost. Estimates of the capital cost vary between EPA and the AETF Trout Subgroup, but both estimates are presented.

Response: [ Engineering response needed.]

Issue Outline Code: 15 Model Facility Impacts Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 15 16 All effluent treatment options resulted in negative net returns for the medium sized farms in both NC and ID ( Table 6). These results showed that none of the treatment options proposed is economically feasible for this farm size.

Table 6. Net returns and probability of achieving positive net returns after imposing various effluent treatment options, Monte Carlo simulation risk analysis.

Treatment strategies Net returns from North Carolina farm scenario Net returns from Idaho farm scenarios Medium ( 150,000 lb/ yr) Medium ( 200,000 lb/ yr) Large ( 2,500,000 lb/ yr)

Most likely Probability of positive returns Most likely Probability of positive returns Most likely Probability of positive returns $ % $ % $ % Low cost scenarios Baselinea 8,644 46 5,647 2 284,281 84 Option 1b  25,509 0  33,810 0 43,087 11 Option 2c  27,180 0  35,469 0 41,427 10 Option 3d  32,320 0  39,879 0 35,573 10 Option Ae  25954 0  31066 0 45832 11 Option Bf, w/ solids control BMP  28848 0  33924 0 42974 11 Option Bf, microscreens, EPA  29020 0  33402 0 42232 11 Option Bf, microscreens, AETF  43776 0  48888 0  43278 0 High cost scenarios Baselineg 6,125 40 3,128 1 271,688 82 Option 1h  55,908 0  65,142 0  259,844 0 Option 2c  57,579 0  66,801 0  21,503 0 Option 3i  77,474 0  86,697 0  352,686 0 Option Ae  56,352 0  62,398 0  257,098 0 Option Bf,

w/ solids control BMP  59,246 0  65,256 0  259,958 0 Option Bf,  59,418 0  64,734 0  260,700 0 17 microscreens, EPA Option Bf, microscreens, AETF  74,174 0  80,220 0  346,208 0 aExcluding land financing costs. bIncludes: solids control BMP plan, compliance monitoring done by automatic composite sampler, quiescent zones without negative effect on production, offline settling pond constructed without having to destroy tanks and emptied with a vacuum tank, and no additional land purchased for disposal of the solids. cIncludes Option 1 plus a drug and chemicals BMP plan. dIncludes Options 1 and 2 plus solid polishing with microscreen filters ( estimates adapted from USEPA 2002). ePrimary settling, BMP plans for drugs and chemicals, escape prevention, and reporting INAD and extra label drug use. fIncludes Option A plus either a BMP plan for solids control or solids polishing with microscreen filter. gIncluding land financing costs. hIncludes: solids control BMP plan, compliance monitoring done by hand, quiescent zones which proportionately reduce production, offline settling pond constructed by having to destroy tanks and emptied with a front end loader, and additional land purchased for disposal of the solids. iSolids polishing with microscreen filters ( TSAETF 2003).

Response: Table 6 indicates the marginality of the two medium model projects. Normal variation in the parameters is sufficient to push 98 percent of the medium ID farms and 64 percent of the NC farms into unprofitability before the addition of incremental pollution control costs. Engle et alia note the percentage of unprofitable enterprises ( see AAPNODA 847 16) but do not discuss the observation as indicating the baseline enterprises are on the knife edge of profitability. This, combined with the high cost estimates and Monte Carlo analysis assumptions ( see response to comment AAPNODA 847 8) leads to the inferred high level of impacts.

The information in Table 6 highlights a fifth difference in the economic methodologies between the Engle et alia and EPA studies. EPA follows Agency and OMB guidance in that facilities which are not profitable in the baseline ( i. e., prior to any additional costs) cannot be considered as impacts of the rule. EPA found 35 or 49 of the estimated 110 commercial facilities to be unprofitable in the baseline depending on whether cash flow or net income was used as the measure for earnings. The projected closures of these facilities cannot be attributed to the rule. For discussion of implications of this rule, see response to comment APNODA 847 7 and 13.

Issue Outline Code: 13B Methodological Overview 18 Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 16 Net returns for the largest farm size considered were still positive after imposing the lowest cost scenarios for each treatment option. However, while positive, net returns were only $ 31 38/ MT of production. This low level of profitability would generate a return on average investment of less than 4%. Such a low rate of return is unlikely to be sufficiently attractive for investors. The opportunity costs of using this capital in trout farming are likely to be too great to continue to operate over time. Net returns became negative for all treatment options considered for the large farm under the high cost scenarios.

Response: EPA's decision criterion is the clear breakpoint of " profitable before regulation and unprofitable after regulation" to identify impacts. EPA calculates the present value of future earnings with a 7 percent real discount rate to address the opportunity costs of capital. EPA did not identify what constituted an " acceptable" rate of return because USDA data indicate that, on average, limited resource, retirement, residential/ lifestyle, and low sales (<$ 100,000) farms show losses from farming activities; high sales farms and large family farms (<$ 500,000) obtain about half their income from off farm sources; and, overall, 91 percent of farm operator's household income came from off farm sources in 2001 ( USDA, Agricultural Income and Finance: Annual Lender Issue, AIS 80, March 11, 2003).

See response to comment AAPNODA 847 8 regarding the overestimation of compliance costs. The overestimated costs result in the impacts seen for the large enterprise.

Issue Outline Code: 15 Model Facility Impacts Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 17 The risk analyses resulted in estimates of the probability of each scenario generating positive net returns ( Table 6). The estimated probabilities of achieving positive net returns for the North Carolina baseline scenario were 46% for the low cost scenario and 40% for the high cost scenario. These probabilities dropped to 2% and 1%, respectively for the medium sized farm in Idaho. These relatively low probabilities reflect the low profitability of trout farming on this scale if all family labor and management are charged at full rates. The probability of obtaining positive 19 net returns was highest for the largest farm size in Idaho, 84% for the low cost base scenario and 82% for the high cost base scenario. These high probabilities of positive net returns likely reflect economies of scale associated with trout farming.

Response: See response to comment AAPNODA 847 7, 13, and 15 regarding baseline closures. See response to comment AAPNODA 847 11 regarding the possible misalignment of populations examined in the Engle et alia and EPA studies.

Issue Outline Code: 15 Model Facility Impacts Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 18 Imposing the various effluent treatment options decreased the probability of generating positive net returns to 0% for the medium sized farms in North Carolina and Idaho as well as for the highcost scenario on the large Idaho farm. Thus, not only are mean expected net returns estimated to be negative but there is an extremely low probability of these farms surviving the additional costs associated with the proposed treatment alternatives. For the low cost scenario on the large Idaho farm, the probability of obtaining positive net returns decreased to 11% for Option 1 and to 10 11% for the other options. Thus, even though net returns were still positive after imposing the proposed treatment options, the financial risk increases substantially.

Response: See response to comment AAPNODA 847 7, 13, and 15 regarding baseline closures. See response to comment AAPNODA 847 11 regarding the possible misalignment of populations examined in the Engle et alia and EPA studies.

Issue Outline Code: 13B Methodological Overview Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 19 20 The cost analyses presented in this study include all labor and management costs even if these represent unpaid family labor. However, opportunity costs are real costs when a farm operator is making long term decisions related to their business. If the increased time burdens on labor and management from effluent treatment options become so great that the operator and family have more attractive alternatives, that farmer will choose to do something else with his/ her time and the farm may close. Consideration of the effects on unpaid family labor and management is critical to this type of analysis. Inclusion of costs of family labor is the most appropriate way to include this resource in economic analyses ( Kay and Edwards 1994).

Response: See response to comment AAPNODA 847 13 regarding unpaid labor and management.

Issue Outline Code: 15 Model Facility Impacts Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 20 Results of Mixed Integer Programming Analysis Base Scenario Net returns above variable costs in the base solution of the model for the medium sized farm in North Carolina were $ 59,877 ( Table 7). Note that these returns do not represent profits because annual fixed costs are not included. Fixed costs are complex to account for in mathematical programming models and objective functions are frequently specified as net returns above variable costs for this reason. However, annual net returns for these treatment options were negative, as shown in Table 6. These models were developed to explore additional constraints and limitations imposed by the proposed treatments.

Response: Engle et alia is inconsistent in that the mixed integer programming analysis does not include annual fixed costs, sunk costs, or capital replacement costs as recommended in AAPNODA 847 34.

The positive returns shown in the baseline and the negative returns seen in the regulatory scenario result from the high compliance costs used in Engle et alia. One factor in the high costs is the assumption that all facilities include all costs for each component in the option. That is, treatment in place in the baseline scenario is not considered. Following OMB guidance, EPA considers treatment in place when estimating facility specific costs of compliance. See also response to comment APPNODA 847 8 regarding overestimated compliance costs. 21 Issue Outline Code: 15 Model Facility Impacts Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 21 In the base scenario, all tanks on the NC farm were in production with 26 used for foodfish trout production and 4 used to produce trout for the recreational market. Of the total operating capital required ($ 140,000), $ 75,000 was equity capital ( retained earnings) and the remaining $ 65,000 was borrowed at an interest rate of 8%. The investment capital level used in the model was $ 90,000. The additional $ 90,000 of borrowing capacity specified was not used in the base scenario. Part time labor was hired in the model because family labor alone was not sufficient to meet all labor and management requirements on the farm. Baseline farms were economically feasible even with no owner equity in operating capital. Without owner equity, net returns would be reduced by the amount of the interest charged on all operating capital, or $ 6,000, for total net returns of $ 53,877. Varying levels of interest on operating capital affected the overall level of net returns but did not result in changes in the basic farm production plan.

The base scenario model was particularly sensitive to the level of credit reserves both for operating and investment capital. Reductions in total available operating capital ( equity capital plus borrowing capacity) resulted in reducing the number of tanks in production and a consequent reduction in net returns above variable costs of $ 5,455 from the scenario in which 100% of the operating capital was borrowed ( Table 7). This sensitivity to availability of operating capital ( regardless of whether equity or borrowed) is important because the maximum amount of operating capital ( for either a line of credit or a standard loan) is frequently set as a percentage of the value of the crop.

Response: The authors do not state the basis for the $ 90,000 in borrowing capacity except to say that it is frequently set as a percentage of the value of the crop. EPA examined agricultural lending practices when developing its methodology. USDA notes that " Farm lenders also learned the risks of lending on the basis of collateral in the 1980s and have instituted better loan analysis tools based on cash flow and other criteria." ( USDA, Agricultural Income and Finance: Annual Lender Issue, AIS 80, March 11, 2003, p. 12). Most agricultural loan programs have requirements for adequate cash flow and/ or debt/ asset ratios ( see ERG, 2004, " CAAP Facilities: Access to Credit and Limits on Borrowing Capacity," memorandum to EPA, in the rulemaking record). EPA developed two tests based on USDA methodology (" credit test" and " financial health," see EEBA, Economic and Environmental Benefits Analysis of the Final Effluent Limitations Guidelines and Standards for the Concentrated Aquatic Animal Production Industry, EPA..., DCN 63010, Section 3.2.2). EPA received no comments on these tests. 22 EPA checks to see whether the debt/ asset ratio and ability to repay loans are impaired by the additional costs of the rule. EPA performs a credit test ( borrowing capacity) that calculates the ratio of the pre tax annualized cost of an option and the after tax Maximum Feasible Loan Payment ( MFLP) ( i. e., 80 percent of after tax cash flow). EPA identified any company with a ratio exceeding 80 percent of MFLP as affected under this test ( i. e., the test threshold is actually 64 percent of the after tax cash flow). USDA notes that " Lenders generally require that no more than 80 percent of a loan applicant's available income be used for repayment of principal and interest on loans." ( USDA, 2000a, p. 19). It is felt that the assumption of using an ' actual' threshold of 64% of after tax cash flow lends conservatism to the credit test. the credit test is performed at the company level only because this is the level at which financial institutions make their determination. EPA notes that similar issues ( i. e., increased difficulty obtaining credit) were raised on an Agency rulemaking on the final CAFO regulation. For that rule EPA received no recommendations on possible approaches to deal with these issues as part of its analysis. Similarly for this final regulation, EPA did not receive any recommendations on how to address high debt levels and access to capital constraints among regulated facilities. EPA received no comments about its tests of borrowing capacity or financial health used in the analysis.

The assumption that borrowing capacity is set as a percentage of crop value results in the mixed integer programing model is sensitive to reductions in credit reserves. That is, if the capacity is lowered the value of the crop is implicitly lowered. Lower crop values imply smaller crops and smaller crops need fewer tanks into production. Thus the model is structured such that any additional costs will send the enterprise into a downward spiral.

Issue Outline Code: 13B Methodological Overview Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 22 If a farmer would be required to take tanks out of production for a quiescent zone, total production is reduced, and the operating capital borrowing capacity is also reduced. This factor may not be critical if land adjacent to the farm is available for purchase at prices that are economically feasible. For each $ 20,000 reduction in total operating capital, four tanks were dropped out of production ( Table 7). Net returns would decrease by ca $ 6,000 for each $ 20,000 decrease in operating capital, depending upon the ratio of equity to borrowed operating capital. The decrease in net returns resulted from increased interest costs.

Response: Engle et alia examine a hypothetical situation. EPA did not identify a situation where a site would have to take tanks out of production for a quiescent zone based on the data collected at actual 23 aquaculture facilities in the detailed questionnaire.

In addition, for the barrier to entry analysis EPA estimated that about 10 percent of the facilities incur no costs ( because existing treatment in place meet the requirements) and nearly two thirds of the facilities incur no land or capital costs. Where incremental land and capital costs were incurred, they formed about 1.5 percent of the total assets of the facility. EPA assumed the facility would attempt to maintain production levels, incur the additional costs, and experience lower earnings as a result. EPA then examined the change in earnings for the closure analysis, credit test, and financial health analysis.

Issue Outline Code: 13B Methodological Overview Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 23 Investment capital constraints in the model included both equity capital that could be used for investment and borrowed investment capital. Sensitivity analyses were developed in which: 1) additional land was assumed to be available; 2) investment capital borrowing capacity was assumed to be $ 90,000; and 3) operating capital borrowing capacity was assumed to increase with the addition of any new tanks. The assumed $ 90,000 of borrowing capacity in investment capital was based on the assumption that the land and tanks were owned and served as collateral. Thus, the borrowing capacity would be equal to the value of the land and tanks. Under these assumptions, the model constructed 12 new tanks that would be financed through borrowed capital. Net returns would increase to $ 63,794 from the additional production generated. Labor needs were met in the model by hiring additional part time labor.

Both land prices and tank construction costs affected the farm's ability to add to the physical plant of the business. If the farm did not have land available for construction of new tanks, no new tanks would be constructed even with adequate levels of borrowing capacity. The average land purchase price specified in the model of $ 25,000 was too high for expansion to be feasible. Land prices had to drop to less than $ 13,000/ acre for expansion to be feasible ( Table 8). At a land price of $ 12,500, 16 new tanks would be constructed that, after debt servicing charges, would increase net returns above variable costs to $ 67,179. Land prices of $ 6,000 or less would allow construction of 20 new tanks for net returns above variable costs of $ 70,204. A 40% decrease in tank construction costs resulted in further increases in farm capacity through additional construction of new tanks and net returns above variable costs of $ 76,401$ 77,841, depending upon land price. However, increasing tank construction costs to $ 2,917 had no effect on construction of new tanks. 24 Response:

This is an interesting sensitivity analysis that examines the amount of expansion possible given a mix of land and tank construction costs. It is not a comment on the rule.

Issue Outline Code: 13B Methodological Overview Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 24 With Effluent Treatment Options The mixed integer programming models were not feasible under any proposed effluent treatment options when full costs of quiescent zones and offline settling basins were used in the model ( Table 9). Construction of off line settling basins required higher levels of capital investment than is likely to be available for trout farms in NC. Lenders often impose a cap that limits the total amount of lending to a particular farm; some lenders base this cap on a percentage of the value of the crop inventory. The model could not find a feasible solution when credit reserves were specified in the model at levels commonly used by rural banks for aquaculture loans.

Response: With a starting credit limit of $ 90,000 and land costs for field application for the NC farm of $ 150,000 ( see Engle et alia, Table 5), it is expected that the model could not find a feasible solution. See also response to comment AAPNODA 847 8 regarding overestimated compliance costs.

Issue Outline Code: 13B Methodological Overview Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 25 Since aquaculture is viewed as a high risk activity in areas that are primarily row crop areas, the standards used for evaluating aquaculture loans may differ from those used in other forms of agriculture. Moreover, banks in some states will not use swimming fish inventory as collateral for loans. 25 Response: See response to AAPNODA 847 21 regarding the use of cash flow and debt/ asset ratios as bases for evaluating agricultural loans, rather than inventory or production.

Issue Outline Code: 13B Methodological Overview Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 26 For the model to produce a feasible solution, either the costs of designing and installing quiescent zones and offline settling basins had to be reduced to less than 75% of the estimated cost or the level of borrowing capacity would have to exceed the value of existing facilities. This would require farms to use personal collateral other than the land and tanks themselves. At 75% of estimated costs of constructing quiescent zones and offline settling basins, only 8 tanks were in production and net returns above variable costs were only $ 12,295 ( Table 9). Farms that do not account for all unpaid family labor or sunk costs in equipment and facilities may be able to construct facilities at lower cash costs. Subsequent runs of the model were developed using quiescent zone and offline settling basin investment capital requirements of 50% of the estimated cost.

Table 10 presents results of the mixed integer programming models for the medium sized farm scenario in North Carolina when the various effluent treatment options were forced into the models using the 50% level of estimated construction costs of quiescent zones and offline settling basins. Net returns above variable costs decreased dramatically ( 43% 56%) for Options 1, 2, A, and B with a solids control BMP. The model could not identify a mathematically feasible way to comply with either Options 3 or B with microscreen filters.

Response: See response to comment AAPNODA 847 24 regarding the relative position of the credit limit and one component of a compliance cost. Lowering the compliance costs to a point below the credit limit would permit the model to identify returns above variable costs. See also response to comment AAPNODA 847 8 regarding overestimated compliance costs.

Issue Outline Code: 15 Model Facility Impacts Organization Name: Engle, et al. Organization Type: State government/ Academia 26 Document Number: AAPNODA 847 Excerpt No: 27 Forcing treatment Option 1 into the model resulted in dropping four tanks out of production. Less operating capital was borrowed because fewer tanks were in production, but an additional $ 85,549 of investment capital was borrowed. The additional investment capital was required primarily for primary settling units.

A BMP plan for drugs and chemicals was added to the model to evaluate the impact of imposing Option 2 on medium sized trout farms in North Carolina ( Table 10). The solution was similar to that for Option 1 with slightly lower net returns above variable costs ($ 26,358), a reduction of $ 7,613 that accounted for the increased variable costs, interest on operating capital, and increased hours of part time labor hired.

The use of microscreens for solids polishing and weekly compliance monitoring requirements were added to the Option 2 model to evaluate farm level effects of Option 3. The model could not produce a mathematically feasible solution when Option 3 was imposed for either the EPA or the AETF cost estimates.

Net returns above variable costs of $ 32,859 ( 45% decrease from the base scenario) were obtained when Option A was imposed on the model. Total operating capital borrowed was $ 51,088. Total investment capital borrowed was $ 85,549. Part time labor was hired for 577 hours. Since the driving factor in the model results was the amount of investment capital required for the quiescent and settling basins, results of the sensitivity analyses were similar to those discussed earlier.

Option B with a solids control BMP plan resulted in net returns above variable costs of $ 26,145. Option B with microscreen filters was not mathematically feasible. Negative net returns above variable costs were obtained even with the EPA estimates of microscreen costs.

Response: See response to comment AAPNODA 847 21 regarding the relative position of the credit limit and compliance cost. See response to comment AAPNODA 847 8 regarding the absence of consideration of treatment in place in the baseline scenario. See also response to comment AAPNODA 847 8 regarding overestimated compliance costs.

Issue Outline Code: 15 Model Facility Impacts Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 27 Excerpt No: 28 Figure 1 presents net returns above variable costs for the proposed treatment options for the two Idaho farm scenarios. Overall, trends were similar to those found for the NC farm scenarios. For the medium sized farm, net returns above variable costs decreased to very low levels for proposed treatment Option 1. Option 2 was similar. Option 3 generated negative net returns above variable costs ( for both EPA and AETF cost estimates) for the medium sized farm. Option A resulted in net returns above variable costs of a similar magnitude to those of Options 1 and 2. None of the Option B treatment options were feasible.

Response: See response to comment AAPNODA 847 21 regarding the relative position of the credit limit and compliance cost. See response to comment AAPNODA 847 8 regarding the absence of consideration of treatment in place in the baseline scenario. See also response to comment AAPNODA 847 8 regarding overestimated compliance costs.

Issue Outline Code: 15 Model Facility Impacts Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 29 On the large Idaho farm, net returns above variable costs were positive, but at levels 74 84% lower than pre treatment levels for Options 1, 2, and A. Options 3 and B ( with EPA estimates) were still positive, but at a lower level. Options 3 ( with AETF estimates), B ( with BMP for solids control), and B ( with AETF estimates) were all negative.

Response: EPA acknowledges that the returns for the large Idaho facility remained positive under costs for all options. See also response to comment AAPNODA 847 8 regarding overestimated compliance costs.

Issue Outline Code: 13B Methodological Overview Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 30 28 Investment capital limited the farm's ability to implement the proposed treatment options. Limits on investment capital borrowing resulted in reducing the number of tanks in production. Imposing effluent treatment technologies forces farms to operate at less efficient levels.

Response: By setting an apriori credit limit and not taking treatment in place into account when estimating incremental costs to comply with the rule, the Engle et alia analysis developed scenarios that have high probability of showing impacts under most modeling assumptions ( see response to comments AAPNODA 847 7, AAPNODA 847 13, and AAPNODA 847 15 for discussion of other modeling assumptions).

By tying the credit limit to production or sales rather than using cash flow and debt/ asset ratios to qualify for an agricultural loan, the methodology sets up a downward spiral in that the costs of compliance cause the facility to start cannibalizing itself, see response to comment AAPNODA 847 21.

Issue Outline Code: 13B Methodological Overview Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 31 CONCLUSIONS Trout farming has been a profitable aquaculture business in the U. S., particularly in Idaho and North Carolina. Results of the enterprise budget analysis showed that proposed effluent treatment options result in negative net returns for medium sized farms in both North Carolina and Idaho. Under higher cost scenarios, even the largest farm size considered became unprofitable after imposing treatment options.

Response: EPA disagrees with this conclusion because it is based on overstated costs, costs that do not take into account treatment in place, and not removing models that are not profitable in the baseline before evaluating the effects of the rule.

EPA disagrees with these conclusions as they apply to this rule making in that EPA applies methods and assumptions that are consistent with its efforts to assess economic achievability. There are two main issues to address when considering why the approach taken by Engle et al. is less applicable to assessing economic achievability: ( 1) compliance cost assumptions, and ( 2) economic analysis methods. For cost assumptions, the Engle et al. analysis assumes no abatement in place for all facilities and substantially higher costs for offline settling and other cost categories ( see response to comment AAPNODA 847 8). EPA uses facility specific detailed survey 29 responses to determine what technology facilities have in place, and then estimates incremental cost needed to meet requirements. This is the traditional approach for assessing economic achievability. For economic analysis methods, Engle et al. relies on methods that ( a) do not account for baseline closures, ( b) examines " representative facilities", and ( c) relies on limited survey information of trout flow through facilities in ID and one county in NC ( see response to comments AAPNODA 847 7, AAPNODA 847 13, and AAPNODA 847 15). EPA conducts traditional facility specific analysis ( implying no need to create representative facilities  note that EPA was criticized for relying on representative facilities for the proposed rule) using facility specific data from a national survey of all CAAP system operations ( not just trout flow through). EPA also identifies baseline closures and is therefore able to differentiate between closures due to the rule and other closures likely to occur, even in the absence of the rule ( in accordance with EPA economic guidance). EPA's methods are similar to methods used for majority of past ELGs.

Issue Outline Code: 13B Methodological Overview Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 32 The risk analysis showed very low probabilities of generating positive net returns after imposing treatment options for all farm sizes and cost levels.

Response: The authors do not note that Table 6 in the report indicates a very low probability of generating positive net returns before imposing treatment options. Keeping the unprofitable facilities in the analysis obscures the potential impacts of the rule. See response to comments AAPNODA 847 7, AAPNODA 847 13, and AAPNODA 847 15.

Issue Outline Code: 15 Model Facility Impacts Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 33 The mixed integer programming models further demonstrated that proposed treatment options will not be economically feasible for trout farms in North Carolina and Idaho. Limits to the 30 borrowing capacity of both operating and investment capital were the primary factors. The models showed that the high land prices in areas adjacent to trout farms prevent their expansion. If additional production area is taken out of production in order to treat effluents, then the operating capital borrowing capacity is reduced; yet, investment capital borrowing would need to increase.

Response: Limits to borrowing capacity are based on the assumption that the amount of credit available is based on production. In contrast, EPA examines impacts on borrowing capacity and financial health through cash flow and debt/ asset ratios, i. e., following USDA methodology and requirements from several agricultural loan programs ( see response to comments # 21).

EPA does not assume facilities will expand in order to respond to the requirements of the regulation, see EEBA, Economic and Environmental Benefits Analysis of the Final Effluent Limitations Guidelines and Standards for the Concentrated Aquatic Animal Production Industry, EPA..., DCN 63010, Section 3.2.1. EPA does not assume a facility can " grow" its way out of potential economic impacts. EPA assumed the facility would attempt to maintain production levels, incur the additional costs, and experience lower earnings as a result. EPA then examined the change in earnings for the closure analysis, credit test, and financial health analysis.

EPA examined facility specific data collected in the detailed questionnaire and did not identify cases where a facility needed to take tanks out of production to treat effluents. Therefore, EPA did not start the downward spiral of few tanks and lower production leading to lower credit limits triggered by the Engle et alia methodology.

Issue Outline Code: 15 Model Facility Impacts Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 34 Some farms have adopted some of the treatment options proposed by EPA. It is likely that these farms were able to do so because additional land at affordable prices was available or because sunk costs on older farms were not generating cash expenses. This would allow these farms to expand production to offset the increased fixed costs associated with treatment. However, sunk costs in capital goods will eventually need to be replaced and economic analyses must consider long run effects.

Response: 31 This comment is internally inconsistent. First it notes that sunk costs might not have been generating cash expenses and then says that economic analyses must consider the costs to replace capital goods. The mixed integer programming model explicitly does not consider fixed costs including sunk costs. The enterprise budget approach includes depreciation as a cost; EPA provided a detailed explanation why depreciation is a poor measure of sunk costs or capital cost replacement in EEBA, Economic and Environmental Benefits Analysis of the Final Effluent Limitations Guidelines and Standards for the Concentrated Aquatic Animal Production Industry, EPA..., DCN 63010, Appendix A.

EPA does not assume facilities will expand in order to respond to the requirements of the regulation, see EEBA, Economic and Environmental Benefits Analysis of the Final Effluent Limitations Guidelines and Standards for the Concentrated Aquatic Animal Production Industry, EPA..., DCN 63010, Section 3.2.1. EPA does not assume a facility can " grow" its way out of potential economic impacts. EPA assumed the facility would attempt to maintain production levels, incur the additional costs, and experience lower earnings as a result. EPA then examined the change in earnings for the closure analysis, credit test, and financial health analysis.

Issue Outline Code: 13B Methodological Overview Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 35 This study further documented the relatively high levels of financial risk on trout farms. The proposed regulations considered in this analysis required additional investment capital that further increased financial risk. While some fish farmers successfully manage around relatively high levels of financial risk, at some point the risk becomes greater than the operator's ability or willingness to accept. The farm then shuts down.

Response: It is not clear what the commenter means by documenting the relatively high financial risk on trout farms unless they mean the likelihood of unprofitability in the baseline. By not removing " baseline failures" from the analysis, the study obscures the potential impacts of the rule within impacts from normal variation within the population. See response to comment AAPNODA 847 7, AAPNODA 847 13, and AAPNODA 847 15. EPA does not disagree that some farms might close; the question is whether those closures are a result of the rule.

Issue Outline Code: 15 32 Model Facility Impacts Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 36 Limits to borrowing capacity forced farms to take tanks out of production.

Response: EPA did not identify a facility that would need to take tanks out of production AAPNODA 847 21 for discussion of borrowing capacity.

Issue Outline Code: 13B Methodological Overview Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 37 The budget analysis showed that larger farms can manage the expense of treating effluents better than smaller farms, but imposing these regulations forces farms to reduce production due to limited capacity to borrow additional funds. Thus, these proposed regulations create a paradox for farmers in that the increased investment capital required for compliance increases economies of scale and incentives to expand farm size. However, since the additional investment is not generating additional production, it uses up borrowing capacity and causes farmers to reduce production potential. Thus, farms are forced to operate at less efficient levels.

Response: EPA does not assume facilities will expand in order to respond to the requirements of the regulation, see EEBA, Economic and Environmental Benefits Analysis of the Final Effluent Limitations Guidelines and Standards for the Concentrated Aquatic Animal Production Industry, EPA..., DCN 63010, Section 3.2.1. EPA does not assume a facility can or will " grow" its way out of potential economic impacts. EPA assumed the facility would attempt to maintain production levels, incur the additional costs, and experience lower earnings as a result. EPA then examined the change in earnings for the closure analysis, credit test, and financial health analysis.

In its Regulatory Flexibility Analysis, EPA examines the need for the rule. One reason for the need for a Federal regulation is a market failure from externalities. A rule causes a discharger to internalize the costs of environmental damage caused by the discharge. EPA does not dispute that causing a discharger to internalize costs of pollution control might result in less profitable, but 33 that does not automatically render a rule economically unachievable.

Issue Outline Code: 15 Model Facility Impacts Organization Name: Engle, et al. Organization Type: State government/ Academia Document Number: AAPNODA 847 Excerpt No: 38 Overall, the proposed regulations pose serious economic challenges to trout farms, increase financial risk on farms, and increase economies of scale and barriers to entry. Limitations on borrowing capacity may force existing farms to substitute treatment facilities for production units and, thus, operate at less efficient levels.

Reponse: EPA disagrees. The two studies differ markedly in methodological approach to estimating the impacts of the rule. These differences lead to different conclusions in each study.

First, EPA uses facility specific data collected in the detailed questionnaire. That is, a separate analysis is made for each observation. The Engle et alia study uses a " representative model" approach.

Second, through its facility specific approach, EPA uses matched sets of costs, revenues, and treatment in place for each facility analyzed. The Engle et alia study collected financial data from its survey of trout operators in North Carolina and Idaho and compiled representative farm enterprise budgets. The " representative" budgets are based on data that include facilities which show negative returns before any incremental pollution control costs are incurred. EPA believes its facility level approach using actual financial data as reported in its detailed survey of regulated facilities provides a more realistic picture of the baseline financial conditions at these facilities.

Third, the Engle study does not remove from its analysis operations that show negative returns pre regulation. It is established EPA practice as well as OMB guidance to develop a baseline scenario of how the world would look absent the regulation. This leads to EPA removing " baseline closures" from its regulatory analyses. EPA believes that the approach used in the Engle study shows artificially low financial conditions since it includes financial data from nonviable firms using its average representative farm model approach. That is, the findings do not distinguish between the effects of the rule from the normal variation in operational effects.

Fourth, another way the Engle study's approach differs markedly from EPA's is in its accounting of expected compliance costs and its evaluation of regulatory impacts. Specifically, the Engle study does not account for operations that are already complying with the expected regulatory 34 options; nor does it account for " treatment in place" of various technologies at these facilities ( i. e., accounts for total economic costs regardless of what's already at the operation). EPA's facility level approach utilize the Agency's detailed survey information to determine facilities that either do not discharge wastewater to waters of the U. S. ( and so would not incur any costs under the final regulation) or have some " treatment in place." Therefore, EPA's analysis reflects the expected " incremental" costs of complying with the final regulation, not accounting for what the regulated facility already has in place. EPA believes this facility level approach provides a more realistic picture of the regulatory impacts a facility will incur as a result of complying with the final regulation.

Finally, the Engle study's estimates financial conditions at regulated operations that includes cost estimates for " unpaid" labor. EPA's analysis does not account for unpaid labor because the Agency's detailed survey indicates that few ( 2 surveyed facilities) report unpaid labor costs; however, EPA conducts additional sensitivity analyses of its results to account for potential unpaid labor costs among facilities that report such costs. Because the Engle study accounts for unpaid labor costs using an average representative farm model approach, EPA believes that the resultant baseline financial conditions are artificially low.

See also response to comment AAPNODA 847 31 ACKNOWLEDGMENTS The authors thank the trout farmers in Idaho and North Carolina who participated in the survey interviews. This material is based upon work supported by the Cooperative State Research Education and Extension Services, U. S. Department of Agriculture, under Agreement No. 00 38859 9235.


[Federal Register: October 21, 2005 (Volume 70, Number 203)]
[Notices]
[Page 61271-61272]
[DOCID:fr21oc05-56]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. RP05-453-002]

Garden Banks Gas Pipeline, LLC; Notice of Compliance Filing

October 14, 2005.
    Take notice that on October 11, 2005, Garden Banks Gas Pipeline,
LLC (Garden Banks) tendered for filing as part of its FERC Gas Tariff,
Original Volume No. 1, the following tariff sheets to become effective
November 10, 2005:

Substitute First Revised Sheet No. 64
Second Substitute Fourth Revised Sheet No. 137

    Garden Banks states that the above-referenced tariff sheets are
being filed in accordance with section 154.204 of the Commission's
regulations in order to comply with the directives contained in
Commission staff's telephone conversation on October 6, 2005.
    Any person desiring to protest this filing must file in accordance
with Rule 211 of the Commission's Rules of Practice and Procedure (18
CFR 385.211). Protests to this filing will be considered by the
Commission in determining the appropriate action to be taken, but will
not serve to make protestants parties to the proceeding. Such protests
must be filed in accordance with the provisions of Section 154.210 of
the Commission's regulations (18 CFR 154.210). Anyone filing a protest
must serve a copy of that document on all the parties to the
proceeding.
    The Commission encourages electronic submission of protests in lieu
of paper using the ``eFiling'' link at http://www.ferc.gov. Persons

unable to file electronically should submit an original and 14 copies
of the protest to the Federal Energy Regulatory

Commission, 888 First Street, NE., Washington, DC 20426.
    This filing is accessible online at http://www.ferc.gov, using the

``eLibrary'' link and is available for review in the Commission's
Public Reference Room in Washington, DC. There is an ``eSubscription''
link on the Web site that enables subscribers to receive e-mail
notification when a document is added to a subscribed docket(s). For
assistance with any FERC Online service, please e-mail
<EMAIL_ADDRESS>or call<PHONE_NUMBER> (toll free). For

TTY, call<PHONE_NUMBER>.

Magalie R. Salas,
Secretary.
 [FR Doc. E5-5816 Filed 10-20-05; 8:45 am]

BILLING CODE 6717-01-P