Table 5 8b. Estimated Employment Losses Estimated Cost Pass Through Option Single Family Multifamily Commercial Number Pct. of Total Number Pct. of Total Number Pct. of Total 1 5 0.001% 1 0.003% 16 0.003%

2 22 0.006% 5 0.014% 61 0.011%

3 0 0.000% 0 0.000% 0 0.000%

Option Industrial Heavy TOTAL Number Pct. of Total Number Pct. of Total Number Pct. of Total 1 7 0.005% 0 0.000% 29 2 20 0.013% 65 0.023% 173 3 0 0.000% 0 0.000% 0 Source: EPA estimates based on the methodologies presented in Chapter Four.

5 19 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 5.6 ANALYSIS OF BARRIER TO ENTRY This section presents the results of EPA   s barrier to entry analysis. As discussed in Section 4.3.3, 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. .

5.6.1 Building Construction As shown in Table 5 9a, compliance costs represent a maximum of 0.82 percent of a model establishment   s current assets ( 0.60 percent of total assets) across all options and project types. These maximum projected impacts occur in the multifamily sector. For the industrial and commercial sectors,

compliance costs are less than 0.30 percent of current assets, while in the single family sector, costs are less than 0.25 percent of current assets. Table 5 9b shows the barrier to entry analysis results under an estimated CPT scenario. As shown, the impacts are smaller than under the zero CPT scenario, with the maximum impact on both current assets and total assets at less than 0.10 percent.

5 20 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 9a. Barrier to Entry Analysis   Zero Cost Pass Through Option Compliance Costs Divided by:

Current Assets Total Assets Min Max Min Max Single Family Residential 1 0.000% 0.100% 0.000% 0.070%

2 0.000% 0.230% 0.000% 0.170%

3 0.000% 0.000% 0.000% 0.000%

Multifamily Residential 1 0.000% 0.260% 0.000% 0.190%

2 0.000% 0.820% 0.000% 0.600%

3 0.000% 0.000% 0.000% 0.000%

Commercial 1 0.000% 0.120% 0.000% 0.090%

2 0.000% 0.270% 0.000% 0.220%

3 0.000% 0.000% 0.000% 0.000%

Industrial 1 0.000% 0.110% 0.000% 0.080%

2 0.000% 0.250% 0.000% 0.190%

3 0.000% 0.000% 0.000% 0.000%

Source: EPA estimates based on the methodologies presented in Chapter Four.

5 21 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 9b. Barrier to Entry Analysis   Cost Pass Through Source: EPA estimates based on the methodologies presented in Chapter Four. Option Compliance Costs Divided by:

Current Assets Total Assets Min Max Min Max Single Family Residential 1 0.000% 0.015% 0.000% 0.011%

2 0.000% 0.034% 0.000% 0.025%

3 0.000% 0.000% 0.000% 0.000%

Multifamily Residential 1 0.000% 0.022% 0.000% 0.016%

2 0.000% 0.069% 0.000% 0.050%

3 0.000% 0.000% 0.000% 0.000%

Commercial 1 0.000% 0.012% 0.000% 0.009%

2 0.000% 0.028% 0.000% 0.022%

3 0.000% 0.000% 0.000% 0.000%

Industrial 1 0.000% 0.016% 0.000% 0.013%

2 0.000% 0.038% 0.000% 0.029%

3 0.000% 0.000% 0.000% 0.000%

5.6.2 Nonbuilding Construction The barrier to entry analysis also produced results in line with the results previously reported for the other four industries. Table 5 10 shows the results of this analysis. Under a zero CPT assumption,

compliance costs are less than one percent of both current and total assets using the best estimate compliance cost. Using the worst case estimate, compliance costs are slightly above 2.5 percent of current assets and nearly 1.5 percent of total assets. With cost pass through, these impacts are significantly lower.

5 22 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 10. Barrier to Entry Analysis  Highway Construction Compliance Cost Assumption Compliance Costs Divided By:

Current Assets Total Assets Zero Cost Pass Through Baseline 0.00% 0.00%

Worst Case 0.29% 0.17%

With 90 Percent Cost Pass Through Baseline 0.00% 0.00%

Worst Case 0.03% 0.02%

Source: EPA estimates based on the methodologies presented in Chapter Four.

5.7 ANALYSIS OF IMPACTS ON NATIONAL CONSTRUCTION MARKETS EPA used three approaches to estimate the potential impacts of the regulatory options on the national single family housing construction market. This section presents the results of these analyses.

In the first approach, EPA analyzed the impacts of the proposed rule on consumers under the assumption that developers and builders pass on 100 percent of the costs to the new single family home buyer. To assess these impacts, EPA developed a model that 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 proposed regulations.

EPA   s second approach applies a partial equilibrium model to 220 metropolitan housing markets to estimate how compliance costs change the proportion of homes in the market that the median income household can afford, termed the Housing Opportunity Index ( HOI) . HOI is published quarterly by the NAHB. This index offers a similar estimate of the change in housing demand that may arise from the effluent guideline in terms of a familiar, widely publicized, indicator.

5 23          Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 The third approach is a single national partial equilibrium model. Changes in prices and quantities from this model are used to derive the impacts on employment and social welfare.

EPA   s methodology for these models is discussed more fully in Section 4.5.

5.7.1 Residential Construction Markets <IP_ADDRESS> Housing Affordability Table 5 11 shows that the incremental costs of the proposed rule add a maximum of $ 58 to the $ 82,472 in income that is required to purchase the baseline model home. After this income change,

between 5,200 and 29,000 households ( 0.03 percent to 0.15 percent of total qualifying households)

would fail to qualify for a mortgage.

Table 5 11. Impact of Erosion and Sediment Control Costs on Housing Affordability ( All Dollar Amounts are in Constant, Pre tax, 1997 Dollars)

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 ( Percent)

1 $ 20 $ 36 $ 82,482 $ 10  5.2  0.03%

2 $ 111 $ 201 $ 82,529 $ 58  29.1  0.15%

3 $ 0 $ 0 $ 82,472 Source: EPA estimates based on the methodologies presented in Chapter Four.

<IP_ADDRESS> Housing Opportunity Index The HOI is an alternative measure of housing affordability. EPA estimated the change in HOI from its baseline value for 220 regional housing markets. Table 5 12 summarizes these results in terms 5 24 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 of the average change calculated across each Census Bureau division. Since the HOI encompasses both existing and new housing, the results show the net effect for the entire housing market. The value of the HOI 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 proposed regulation has little effect on regional HOI. Table 5 13 shows the percentage change in HOI by Census division. Option 1 changes HOI by less than two hundredths of one percent in all regions. Option 2 changes HOI by less than 0.2 percent. The largest changes occur in the South Atlantic region. These changes are much smaller in scale than annual changes that result from normal shifts in real estate market conditions and demography of the market areas.

Table 5 12. Single Family Residential Average HOI 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 54.24 62.36 72.66 78.81 70.30 69.69 64.73 44.57 32.62 2 54.23 62.31 72.59 78.74 70.24 69.65 64.69 44.55 32.61 3 54.24 62.37 72.67 78.82 70.31 69.70 64.73 44.58 32.63 HOI indicates the percent 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 13. Single Family Residential Percentage Change in HOI 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 0.00%  0.02%  0.02%  0.02%  0.02%  0.01%  0.01%  0.01%  0.01%

2  0.02%  0.10%  0.10%  0.10%  0.11%  0.08%  0.07%  0.07%  0.04%

3 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

HOI indicates the percent of households in each region that can afford the median priced house. Source EPA estimates based on the methodologies presented in Chapter Four.

5 25 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 <IP_ADDRESS> Single Family Housing Prices and Quantities Table 5 14 shows the results of EPA   s analysis using the market model approach. The table shows the estimated changes in median single family home prices from all combinations of the proposed options. The changes in costs range from $ 0 to $ 111. 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 some costs would be borne by the builder developer. The largest increase in price reduces the quantity that can be sold by about two hundredths of one percent. The total loss in output to the construction industry ranges from $ 0 to $ 72 million.

Table 5 14. Single Family Residential   Changes in Price and Quantity From the Baseline ( All Dollar Values Are in Constant, Pre tax, 1997 Dollars)

Option Change in Cost ( $ / Unit) New Price ( $ / Unit) Price Change ( $ / Unit) Quantity Change ( Units) Quantity Change ( Percent) Loss of Output ( $ Million)

1 $ 20 $ 288,414 $ 17 ( 44)  0.00%  $ 12.8 2 $ 111 $ 288,492 $ 95 ( 248)  0.02%  $ 71.6 3 $ 0 $ 288,397 $ 0 0  0.00% 0 Source: EPA estimates based on the methodologies presented in Chapter Four.

<IP_ADDRESS> Multifamily Housing Prices and Quantities Table 5 15 shows the estimated changes in median price of a unit in a multifamily building from the proposed options. The changes in costs range from $ 0 to $ 40 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 $ 40 per unit.

5 26 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 15. Multifamily Residential   Changes in Price and Quantity From the Baseline ( All Dollar Values Are in Constant, Pre tax, 1997 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 $ 7 $ 132.53 $ 7  7 0.00%  $ 0.9 2 $ 40 $ 132.57 $ 40  41 0.01%  $ 5.2 3 $ 0 $ 132.53 $ 0 0 0.00%  $ 0.0 Source: EPA estimates based on the methodologies presented in Chapter Four.

5.7.2 Non Residential Construction Markets <IP_ADDRESS> Commercial Space Rental prices for commercial space are typically quoted in dollars per square foot per year. Table 5 16 shows the estimated changes in median rental rate of a square foot of commercial space from the proposed options. The changes in costs range from $ 0 to $ 0.02 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.

Price changes range from $ 0 to $ 0.02 per square foot. Quantity reductions are estimated to reach seven hundredths of one percent for the most costly option. The total loss in output to the construction industry ranges from $ 0 to $ 67.1 million.

5 27 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 16. Commercial   Changes in Price and Quantity From the Baseline ( All Dollar Values Are in Constant, Pre tax, 1997 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 $ 14.67 $ 0.00  36  0.01%  $ 14.7 2 $ 0.02 $ 14.69 $ 0.02  163  0.07%  $ 67.1 3 $ 0.00 $ 14.66 $ 0.00 0  0.00% $ 0.0 Source: EPA estimates based on the methodologies presented in Chapter Four.

<IP_ADDRESS> Industrial Space Only 12,100 industrial projects are estimated to start in the base year. Rental prices for industrial space are typically quoted in dollars per square foot per year. Table 5 17 shows the estimated changes in median rental rate of a square foot of industrial/ warehouse space from the proposed options. The changes in costs range from $ 0 to $ 0.02 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 $ 0.02 per square foot. Quantity reductions are estimated to reach 0.3 percent for the most costly option, albeit on a small number of projects in the baseline. The total loss in output to the construction industry ranges from $ 0 to $ 17.8 million.

Table 5 17. Industrial   Changes in Price and Quantity From the Baseline ( All Dollar Values Are in Constant, Pre tax, 1997 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 $ 5.17 $ 0.00  11  0.08%  $ 4.4 2 $ 0.02 $ 5.18 $ 0.02  46  0.32%  $ 17.8 3 $ 0.00 $ 5.16 $ 0.00 0 0.00% $ 0.0 Source: EPA estimates based on the methodologies presented in Chapter Four.

5 28 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 5.7.3 Output and Employment As discussed in Section 4.5, 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 18. Most of the losses are in the large single family residential and catch all 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   Stimulus from Added 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 stimulus adds more jobs than the loss of output takes away, with the result that net employment change from construction impacts is a positive number. In the single family sector, for example, under Option 1 there is a loss $ 12.8 million of output but an offsetting stimulus of $ 21.5 million. The loss represents 475 jobs, but the stimulus generates 797 jobs; the net result is that 322 more jobs are generated. 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 1,400 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 29 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 18. Changes in Output and Total Employment From the Baseline ( All dollar Values Are in Constant, Pre tax, 1997 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 Consumer Spending ( Jobs) Net Change in Total Employment ( Jobs)

Single Family Residential 1 ( $ 12.8) $ 21.5 ( 475) 797 322 ( 498) ( 176)

2 ( $ 71.6) $ 120.2 ( 2,662) 4,467 1,805 ( 2,792) ( 986)

3 $ 0.0 $ 0.0 0 0 0 0 0 Multifamily Residential 1 ( $ 0.9) $ 2.5 ( 34) 91 57 ( 67) ( 10)

2 ( $ 5.2) $ 13.7 ( 192) 509 317 ( 374) ( 56)

3 $ 0.0 $ 0.0 0 0 0 0 Commercial 1 ( $ 14.7) $ 42.6 ( 546) 1,583 1,037 ( 1,062) ( 25)

2 ( $ 67.1) $ 194.7 ( 2,494) 7,234 4,740 ( 4,857) ( 116)

3 $ 0.0 $ 0.0 0 0 0 0 0 Industrial 1 ( $ 4.4) $ 6.7 ( 164) 248 84 ( 152) ( 68)

2 ( $ 17.8) $ 26.9 ( 662) 1,001 338 ( 616) ( 277)

3 $ 0.0 $ 0.0 0 0 0 0 0 Total 1 ( $ 32.8) $ 73.2 ( 1,219) 2,719 1,501 ( 1,780) ( 279)

2 ( $ 161.7) $ 355.5 ( 6,010) 13,212 7,201 ( 8,638) ( 1,436)

3 $ 0.0 $ 0.0 0 0 0 0 0 Source: EPA estimates based on the methodologies presented in Chapter Four.

5.7.4 Changes in Welfare Measures As discussed in Section 4.6, the proposed regulation shifts 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. As Table 5 19 indicates, consumers may lose 5 30 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 from $ 0 to $ 316.6 million, depending on the option selected. Producers lose from $ 0 to $ 40.4 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, termed the   deadweight loss,   ranges from $ $ 0 to $ 200,000.

Table 5 19. Changes in Social Welfare Measures   All Sectors Combined ( All Dollar Values Are in Constant, Pre tax, 1997 Dollars)

Option Total Deadweight Loss ( $ Million) Total Consumer Surplus Loss ( $ Million) Total Producer Surplus Loss ( $ Million)

1 $ 0.0 $ 65.2 $ 8.2 2 $ 0.2 $ 316.6 $ 40.4 3 $ 0.0 $ 0.0 $ 0.0 Source: EPA estimates based on the methodologies presented in Chapter Four.

5.7.5 Regional Effects The multifamily housing and non residential market models estimate impacts at the state level based on information about local real estate markets. The single family housing market model estimates market effects at the MSA level, which can then be aggregated to the state level. Table 5 20 shows the loss in output to the construction industry, by state, from compliance with the more expensive Option 2.

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. For example, multifamily housing in Vermont. California, Pennsylvania, and several other states ( indicated with an e) show no effect as current State regulations were deemed equivalent to the proposed regulations and so there was no incremental impact on firms operating in those states.

Although the totals would be lower for Option 1, the pattern of losses would be similar.

Table 5 21 provides a similar state by state breakdown of the net change in employment as a result of compliance with the proposed regulation. In several states, multifamily housing, commercial,

5 31 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 and industrial stimulus effects are greater than the losses, and the regulation causes a small net positive change in employment within those categories.

Table 5 20. Loss of Output to the Construction Industry by State and Use Category ( $ Millions) ( All Dollar Values Are in Constant, Pre tax, 1997 Dollars) , Option 2 State Single Family Multifamily Commercial Industrial Total Alabama ( 1.2) 0.0 ( 0.9) ( 0.4) ( 2.5)

Alaska ( 0.2) 0.0 0.0 0.0 ( 0.2)

Arizona e e e e e Arkansas ( 0.4) 0.0 ( 0.7) ( 0.2) ( 1.3)

California e e e e e Colorado ( 3.6) ( 0.3) ( 1.2) ( 0.5) ( 5.6)

Connecticut e e e e e Delaware ( 0.3) 0.0 ( 0.5) 0.0 ( 0.8)

District of Columbia ( 4.8) ( 0.2) 0.0 0.0 ( 5.1)

Florida ( 7.4) ( 1.0) ( 15.3) ( 0.9) ( 24.6)

Georgia ( 0.9) ( 0.5) ( 4.1) ( 1.6) ( 7.1)

Hawaii ( 0.4) 0.0 0.0 0.0 ( 0.4)

Idaho e e e e e Illinois e e e e e Indiana ( 3.6) ( 0.1) ( 1.6) ( 1.5) ( 6.9)

Iowa ( 0.7) 0.0 ( 0.7) ( 1.0) ( 2.5)

Kansas ( 0.5) 0.0 ( 0.9) ( 0.5) ( 1.8)

Kentucky ( 1.1) 0.0 ( 1.3) ( 0.8) ( 3.3)

Louisiana ( 1.8) 0.0 ( 1.8) ( 0.2) ( 3.8)

Maine 0.0 0.0 ( 2.4) ( 0.1) ( 2.5)

Maryland ( 2.1) 0.0 ( 2.1) ( 0.3) ( 4.4)

Massachusetts e e e e e Michigan ( 5.9) ( 0.1) ( 2.9) ( 1.1) ( 10.0)

Minnesota ( 3.5) ( 0.1) ( 2.4) ( 1.0) ( 7.0)

Mississippi ( 0.7) 0.0 ( 0.7) ( 0.2) ( 1.7)

Missouri ( 3.1) ( 0.1) ( 2.0) ( 0.6) ( 5.9)

Montana 0.0 0.0 ( 0.3) ( 0.1) ( 0.3)

Nebraska ( 0.6) ( 0.1) ( 0.8) ( 0.2) ( 1.7)

Nevada 4.0 ( 0.3) ( 2.8) ( 0.3) 0.7 New Hampshire e e e e e New Jersey ( 3.9) ( 0.1) 0.0 ( 0.1) ( 4.1)

New Mexico e e e e e New York ( 13.4) ( 0.7) ( 6.9) ( 0.6) ( 21.5)

North Carolina ( 3.2) ( 0.4) ( 3.3) ( 1.5) ( 8.4)

5 32 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 20. Loss of Output to the Construction Industry by State and Use Category ( $ Millions) ( All Dollar Values Are in Constant, Pre tax, 1997 Dollars) , Option 2 State Single Family Multifamily Commercial Industrial Total North Dakota ( 0.1) 0.0 ( 0.3) ( 0.3) ( 0.6)

Ohio ( 6.8) ( 0.2) ( 1.1) ( 1.2) ( 9.3)

Oklahoma e e e e e Oregon ( 1.0) ( 0.1) ( 2.2) ( 0.8) ( 4.1)

Pennsylvania e e e e e Rhode Island ( 0.7) 0.0 ( 1.2) 0.0 ( 1.9)

South Carolina e e e e e South Dakota e e e e e Tennessee e e e e e Texas e e e e e Utah e e e e e Vermont ( 0.1) 0.0 ( 1.2) ( 0.1) ( 1.4)

Virginia e e e e e Washington ( 1.9) ( 0.3) ( 4.1) ( 0.5) ( 6.8)

West Virginia e e e e e Wisconsin ( 1.8) ( 0.2) ( 1.2) ( 1.3) ( 4.4)

Wyoming 0.0 0.0 ( 0.2) 0.0 ( 0.3)

United States Total ( 71.6) ( 5.2) ( 67.1) ( 17.8) ( 161.7)

Note: e indicates state has regulations equivalent to the proposed options. Source: EPA estimates based on the methodologies presented in Chapter Four.

5 33 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 21. Net Change in Total Employment by State and Use Category ( Jobs) Under Proposed Rule Option 2 State Single Family Multifamily Commercial Industrial Total Alabama ( 17) 0 ( 3) ( 5) ( 26)

Alaska ( 3) 0 0 0 ( 3)

Arizona e e e e e Arkansas ( 5) 0 ( 8) ( 3) ( 17)

California e e e e e Colorado ( 50) ( 3) ( 4) ( 4) ( 62)

Connecticut e e e e e Delaware ( 4) 0 ( 2) 0 ( 7)

District of Columbia ( 66) ( 3) 0 0 ( 69)

Florida ( 102) ( 16) ( 15) ( 15) ( 187)

Georgia ( 12) ( 9) ( 28) ( 28) ( 64)

Hawaii ( 5) 0 0 0 ( 5)

Idaho e e e e e Illinois e e e e e Indiana ( 50) ( 1) 49 ( 30) ( 32)

Iowa ( 10) 0 (  3) ( 23) ( 35)

Kansas ( 7) 0 ( 3) ( 8) ( 18)

Kentucky ( 16) ( 1) ( 5) ( 13) ( 34)

Louisiana ( 24) 0 ( 21) ( 3) ( 48)

Maine 0 0 ( 37) 0 ( 37)

Maryland ( 28) 0 ( 7) ( 4) ( 41)

Massachusetts e e e e e Michigan ( 81) 0 57 ( 9) ( 33)

Minnesota ( 49) ( 1) ( 8) ( 17) ( 74)

Mississippi ( 10) 0 ( 3) ( 3) ( 16)

Missouri ( 43) ( 1) ( 7) ( 9) ( 61)

Montana 0 0 ( 3) ( 1) ( 3)

Nebraska ( 8) ( 1) ( 3) ( 3) ( 15)

Nevada 55 ( 7) ( 44) ( 4) 0 New Hampshire e e e e e New Jersey ( 54) 0 24 1 ( 29)

New Mexico e e e e e New York ( 184) 5 56 ( 2) ( 125)

North Carolina ( 44) ( 7) ( 12) ( 29) ( 92)

North Dakota ( 1) 0 ( 1) ( 5) ( 7)

Ohio ( 93) ( 1) 34 ( 21) ( 81)

Oklahoma e e e e e Oregon ( 14) ( 2) ( 28) ( 11) ( 55)

5 34 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 21. Net Change in Total Employment by State and Use Category ( Jobs) Under Proposed Rule Option 2 Source: EPA estimates based on the methodologies presented in Chapter Four. State Single Family Multifamily Commercial Industrial Total Pennsylvania e e e e e Rhode Island ( 9) 0 ( 19) 0 ( 28)

South Carolina e e e e e South Dakota e e e e e Tennessee e e e e e Texas e e e e e Utah e e e e e Vermont ( 2) 0 ( 18) 0 ( 21)

Virginia e e e e e Washington ( 26) ( 4) ( 64) ( 5) ( 99)

West Virginia e e e e e Wisconsin ( 25) ( 3) 37 ( 20) ( 10)

Wyoming 0 0 ( 3) ( 1) ( 3)

United States Total ( 986) ( 56) ( 116) ( 277) ( 1,436)

5.8 IMPACTS ON GOVERNMENTAL UNITS As Section 4.8 discusses, EPA estimates that the proposed rule would impose some costs on governmental units involved in   codifying   the construction general permit. . This section examines the costs imposed on governmental units associated with the proposed Option 2.

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 previously, EPA assumes that the majority of NPDES Phase I and Phase II NPDES storm water permit programs are fully implemented, and that any new regulatory requirements would be superimposed upon these programs.

5 35 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Based on the assumption that all states would change their storm water programs to include certification of sedimentation basins and other aspects of the proposed rule, EPA estimated the annual costs of establishing such a program. These costs are presented in Table 5 22. EPA estimates that states would experience $ 0.26 million in costs staying current with federal guidance, state guidance, and evolving industry practice ( U. S. EPA 2002) .

Table 5 22. Costs To Establish Construction Programs ( $ 1997)

Element Value Units Labor hours to review EPA regulation and modify state practices 200 Hours/ Year Labor cost $ 26.02 $ / Hour/ State State Cost per year $ 5,203 $ / Year/ State Number of States 50 States Totals $ 260,150 $ / Year Source: U. S. EPA. 2002.

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 would need to comply with the proposed regulation so their costs would increase, just as private projects   would. . Roughly one half of government projects are maintenance or reconstruction of existing structures which does not entail new ground disturbance. EPA estimates that approximately 25 percent of total impacts would fall on government projects resulting in a $ 29.2 million additional cost to government entities under proposed Option 1 or a $ 115.9 million 5 36 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 additional cost under proposed Option 2. 4 This effect is discussed in detail in the Unfunded Mandates Reform Act ( UMRA) analysis in Chapter Ten.

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. Chapter Ten addresses the Unfunded Mandates Reform Act ( UMRA) .

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 proposed rule. Another piece of legislation   the Unfunded Mandates Reform Act, or UMRA   also has requirements relevant to EPA   s plans. Chapter Ten addresses UMRA.

Much of the information provided in this section is summarized from other documents that support this proposed rulemaking, 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: :

( 1) 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;

( 2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency;

4 Additional cost to government entities under the proposed ESC options includes costs potentially incurred by Federal, State, and local government entities.

5 37 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 ( 3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or ( 4) 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 the proposed C& D rulemaking is a   significant regulatory action   under the terms of EO 12866, because the total costs of the proposed rule are estimated to exceed $ 100 million annually. As such, this action was submitted to OMB for review. Changes made in response to OMB suggestions or recommendations will be documented in the public record.

In addition to submission of the action to OMB, the principal directives of 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 to the proposed rule, and that the reason for the proposed rule be identified. Wherever possible, the costs and benefits of the proposed rule are to be expressed in monetary terms. To address these directives, the following section describes the reasons why EPA is revising the existing regulations, and Chapters Eight and Nine present the estimated social costs,

pollutant reductions, and monetary benefits of the proposed C& D regulations. Section 5.8 addresses the impacts of the proposed regulations on governmental units. An in depth profile of the potentially affected industry sectors is presented in Chapter Two of this report.

Reason for the Regulation Executive Order 12866 directs the Agency to identify the reason for the regulations being proposed. The reasons for proposing the C& D regulations are stated throughout this report ( Chapters One and Six) and are presented in the preamble of the proposed rulemaking. These reasons are summarized briefly below:

  In spite of existing regulatory controls, there is continued runoff of sediment from construction sites and newly developed areas. Sediment entering public waterways imposes costs on water users in the form of additional demand for pre treatment of water withdrawn and diminished value for in stream uses. Users cannot identify and seek compensation from the construction sites causing the problem. So there is a market failure in terms of the environmental externality of sediment emissions. The proposed 5 38 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 regulations are expected to address the impairment of many U. S. waterways and the associated human health and ecological risks.

  The existing regulation appears to be insufficient to protect or restore water quality. There exists an information asymmetry between builders and enforcement officials in which builders know their level of care with regard to erosion and sediment controls while officials may or may not know. The certification and inspection provisions of the proposed rule increase the level of information available to officials. The revisions would make the regulations apply more uniformly throughout the country and   raise the bar   for storm water control, in general.

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 proposed C& D regulations is presented in the preamble.

A discussion of the UMRA is presented in Chapter Ten 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 proposed actions. Based on guidance in EPA   s Guidelines for Preparing Economic Analyses , the potential effects of the proposed regulation on minority and low income populations have been considered ( U. S. EPA 2000) . EPA has determined that the proposed rule would not have a disproportionately large effect on minority or low income populations, nor would it have disproportionately high human health or environmental effects. Thus no further analysis on environmental justice issues has been conducted for this proposal.

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 proposed rule would have any significant effects on children   s health or safety ( U. S. EPA 2000) . EPA has determined, based on the information provided throughout 5 39 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 this report, that the proposed rule would not have any significant effects on children   s health or safety,

and no further analysis has been conducted for this proposal.

5 40 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 5.10 REFERENCES Tetra Tech. 2002. Personal Communication from J. Swanson, Tetra Tech, Inc. , to J. Cantin, ERG, Inc. January 29.

U. S. Census Bureau 2000.1997 Economic Census: Construction: Subject Series. January.

U. S. EPA 2002.   Development Document for the Effluent Guidelines for the Construction and Development Point Source Category.   Washington, D. C. : U. S. Environmental Protection Agency.

U. S. EPA 2000.   Guidelines for Preparing Economic Analyses.   Washington, D. C. : U. S. Environmental Protection Agency, Report EPA 240 R 00 003, September.

5 41 APPENDIX 5A Closure and Employment Loss Analysis Results Cash Flow Method Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5A 1. Estimated Closures as Percent of Total Establishments Zero Cost Pass Through Cash Flow Method Option Single Family Multifamily Commercial Industrial 1 0.0%  0.0% 0.0%  0.0% 0.0%  0.0% 0.0%  0.0%

2 0.0%  0.0% 0.0%  0.0% 0.1%  0.2% 0.1%  0.1%

3 0.0%  0.0% 0.0%  0.0% 0.0%  0.0% 0.0%  0.0%

Table 5A 2. Estimated Closures as Percent of Total Establishments Cost Pass Through Cash Flow Method Option Single Family Multifamily Commercial Industrial 1 0.0%  0.0% 0.0%  0.0% 0.0%  0.0% 0.0%  0.0%

2 0.0%  0.0% 0.0%  0.0% 0.0%  0.0% 0.0%  0.0%

3 0.0%  0.0% 0.0%  0.0% 0.0%  0.0% 0.0%  0.0%

Single family cost pass through: 85.10% Multifamily cost pass through: 91.55% Commercial cost pass through: 89.87% Industrial cost pass through: 84.75% Cost Pass Through Values Calculated by EPA.

5A 1 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5A 3. Estimated Employment Losses as Percent of Total Employment Zero Cost Pass Through Cash Flow Method Option Single Family Multifamily Commercial Industrial 1 0.0%  0.0% 0.0%  0.0% 0.0%  0.0% 0.0%  0.0%

2 0.0%  0.0% 0.2%  0.2% 0.1%  0.2% 0.1%  0.1%

3 0.0%  0.0% 0.0%  0.0% 0.0%  0.0% 0.0%  0.0%

Table 5A 4. Estimated Employment Losses as Percent of Total Employment Cost Pass Through Cash Flow Method Option Single Family Multifamily Commercial Industrial 1 0.0%  0.0% 0.0%  0.0% 0.0%  0.0% 0.0%  0.0%

2 0.0%  0.0% 0.0%  0.0% 0.0%  0.0% 0.0%  0.0%

3 0.0%  0.0% 0.0%  0.0% 0.0%  0.0% 0.0%  0.0%

Single family cost pass through: 85.10% Multifamily cost pass through: 91.55% Commercial cost pass through: 89.87% Industrial cost pass through: 84.75% Cost Pass Through Values Calculated by EPA.

5A 2 APPENDIX 5B Sensitivity Analysis for the National Partial Equilibrium Model Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 5B. 1 Introduction to Sensitivity Analysis Elasticities of supply and demand are key parameters of the partial equilibrium market models which generate many of the results shown in Chapter 5. Values for these parameters are derived from a consensus of elasticity estimates appearing in the literature. Often differing databases and estimation methods generate different estimates, so the literature contains a wide range of elasticities. Table 5B 1 shows the impact on the results of selecting different sets of elasticities. The first line in each use category section is the cost pass through ( CPT) and impact reported in Table 5 16a, Changes in Output and Total Employment from the Baseline, for the proposed Option 2. The succeeding lines show how the results change with the different combinations of supply and demand elasticities shown in the first two columns. ( As the stimulus is virtually the same in all cases, the   Stimulus from Added Work   and   Change in Employment from Stimulus   columns in Table 5  16a are not shown here. ) Except for single family housing, all of the categories were modeled at the state level so that local market conditions would drive the model. Thus, a range of demand elasticities is chosen as a parameter of the model but the actual elasticity used in each state model is calculated based on an indicator of state market activity. The sensitivity analysis for these categories was conducted by adjusting the range of possible demand elasticities.

As discussed in Section 4.5, housing supply is highly elastic which implies high CPT rates. The sensitivity analysis shows that when the elasticity of supply for single family housing is reduced from 4 to 0.5, the CPT falls from 85 percent to 42 percent. This reduces the change in the quantity of homes sold and the impact on consumers so much that the net effect of the proposed regulation is a creation of 1,800 jobs. Similar changes occur in other use categories. Reducing the elasticity of demand also reduces the impact of the regulation.

5B. 2 Sensitivity Analysis Results Overall, the sensitivity analysis shows that while the results can be changed by manipulation of the assumptions, the assumptions used yield reasonable estimates near the middle of the range of probable outcomes.

5B 1 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5B 1. Sensitivity Tests with Alternative Elasticities Supply Elasticity Demand Elasticity CPT ( % ) Loss of Output ( $ Million) Change in Employment from Lost Output Net Change in Employment from Construction Impacts Change in Employment from Consumer Spending Net Change in Total Employment Single Family Housing 4 0.7 85.11  71.6  2,662 1,805  2,792  986 10 0.7 93.46  78.7  2,923 1,544  3,066  1,522 1 0.7 58.82  49.5  1,840 2,628  1,930 698 0.5 0.7 41.67  35.1  1,303 3,165  1,367 1,798 4 1.0 80.00  96.2  3,575 892  2,624  1,732 4 0.5 88.89  53.4  1,986 2,482  2,916  434 Multifamily Housing 4  0.8   0.2 91.54  5.2  192 317  374  56 10  0.8   0.2 96.42  5.5  203 333  394  61 1  0.8   0.2 73.35  4.0  150 257  299  42 4  1.0   0.2 90.40  5.9  218 284  369  84 4  0.5   0.2 93.34  4.0  150 369  381  12 4  0.8   0.1 93.08  4.2  158 360  380  20 Commercial 4  0.8   0.01 89.87  67.1  2,494 4,740  4,857  116 10  0.8   0.01 95.62  71.5  2,656 4,578  5,119  541 1  0.8   0.01 70.17  51.9  1,930 5,306  3,898 1,408 4  1.0   0.01 87.73  81.6  3,034 4,199  4,757  558 4  0.5   0.01 93.32  44.0  1,633 5,604  5,015 588 4  0.8   0.2 88.16  83.5  3,103 4,130  4,744  615 Industrial 4  1.5   0.2 84.75  17.8  662 338  616  277 10  1.5   0.2 93.21  20.0  742 258  682  424 1  1.5   0.2 59.11  11.7  436 567  418 149 4  2.0   0.2 81.43  21.8  810 190  588  399 4  1.0   0.2 88.43  13.4  498 504  646  142 4  1.5   0.01 86.91  15.8  585 416  630  214 5B 2 APPENDIX 5C Baseline Analysis Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 APPENDIX 5C BASELINE ANALYSIS 5C. 1 INTRODUCTION The main portion of this economic analysis assumes that, in the baseline, the construction and development ( C& D) industry is in full compliance with the existing Storm Water Phase I and Phase II regulations as they apply to construction activities. Since the final deadline for implementation of Phase II is not until March 10, 2003, some affected entities may not yet have adjusted to the Phase II requirements.

Because of the overlap between the proposal of the effluent limitation guideline ( ELG) and the implementation of the Phase II regulations, EPA has completed this alternate baseline analysis. The analysis presents the following:

  Combined national compliance costs and social costs of Phase II and the C& D Effluent Limitation Guideline ( ELG)   This analysis simply adds together the compliance and government costs of the rules.

  Impact of the combined Phase II and ELG costs on representative model projects   This analysis would apply to projects that take place in jurisdictions not yet in compliance with Phase II.

  Impact of the combined Phase II and ELG costs on representative model firms   This analysis would apply to firms for whom 100 percent of operations take place in jurisdictions not yet in compliance with Phase II.

  Impact of the combined Phase II and ELG costs on facility closures and employment levels. This part of the analysis is the most speculative because we have no way of identifying how many firms and what share of their operations would be subject to both rules. To derive these estimates we have assumed that ( 1) firms within a certain size class are most likely to be affected ( because Phase II applies only to sites of 1 to 5 acres in size) , and ( 2) within this group we have estimated only those firms located in non Phase II compliant states would be affected. This second assumption ignores the fact that it is site location, not firm location, that would determine coverage under Phase II, and that many construction firms operate outside their home state.

Note that EPA has not assessed the potential combined benefits of the Phase II and effluent guidelines requirements. The Phase II rule EA indicated benefits from the construction part of the rule of $ 540 to $ 686 million per year ( U. S. EPA 1999, Table 6 20) .

5C 1 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 5C. 2 BASELINE ANALYSIS Throughout the economic analysis of the proposed C& D effluent guidelines, EPA has assumed the industry is in full compliance with all applicable existing laws and regulations related to storm water management ( see U. S. EPA 2002, Section 4.11) . This includes the final storm water Phase II regulations,

which were published on December 8, 1999 ( 64 FR 235; page 68794) . The Phase II rules apply to sites between one and five acres in size.

While many permitting authorities have already begun implementing the Phase II requirements,

the deadline for obtaining permit coverage is not until March 10, 2003. As a result, it is likely that the C& D industry is not uniformly compliant with these requirements at this time. One implication is that the economic baseline used to assess the impacts of the proposed effluent guideline may not reflect industry conditions once the Phase II regulations have been fully implemented. To account for this, EPA has conducted a supplemental analysis that includes the combined costs and impacts of meeting the Phase II requirements and the proposed effluent guidelines. This section describes the methodology used to conduct this analysis and presents the results.

5C. 2.1 National Compliance Costs The economic analysis for the construction component of the final Phase II storm water rule was based on engineering costs developed for three site size classes: 1 , 3 , and 5 acres. Within each site size class EPA developed costs for erosion and sediment control ( ESC) specific to sites in low, medium, and high rainfall regions and with low, medium, and high slope conditions. Since EPA did not have a distribution of sites by rainfall region or slope condition, a simple average of the costs across all site types was used within each size class. Table 5C 1 shows the costs and costs per acre for the three site size classes, with costs updated to 1997 dollars.

5C 2 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5C 1. Costs of Phase II Erosion and Sediment Control, by Site Size ( $ 1997)

Site Size ( Acres) ESC Costs ESC Costs per Acre 1 $ 1,187 $ 1,187 3 $ 4,524 $ 1,508 5 $ 8,569 $ 1,714 Source: Economic Analysis of the Final Storm Water Phase II Rules. U. S. EPA ( 1999) ; ENR ( 2001) .

In addition to the ESC costs, EPA estimated the industry would incur $ 937.46 in administrative costs ( $ 922.42 in $ 1997) for each permitted construction project. These include costs associated with the following elements: notification of intent, municipal notification, storm water pollution prevention plan,

record retention, and notification of termination. Thus, the total costs to industry of compliance with the construction portion of the Phase II rules include the costs of ESC controls and the administrative costs.

The Phase II compliance costs were applied to EPA   s estimate of the number of projects falling within the one to five acre size class. Projects in areas with equivalent programs were excluded, including 14 states covered by equivalent existing state programs and two states and parts of four other states covered by requirements equivalent to those implemented under the Coastal Zone Act Reauthorization Amendments ( CZARA) ( which covers nonpoint sources of pollution, including construction activities, in coastal regions) . The national compliance costs of the Phase II rules were estimated in 1998 dollars to be $ 545  $ 679 million. 1 EPA added the Phase II compliance cost estimates to the compliance costs of the proposed ELG to obtain an alternate estimate of the compliance costs ( and social costs) of the proposed rule under the alternative baseline. Table 5C 2 shows the national costs under the alternative baseline scenario, obtained by adding the national ESC and administrative costs from the Phase II analysis to the national compliance costs associated with the proposed effluent guidelines. The combined industry compliance costs are $ 539.3 million under Option 1 and $ 890.3 million under Option 2. Table 5C 3 indicates the combined social costs are $ 891.1 million for Option 2 ( 1997 dollars) .

1 Source: Phase II final EA, Table 4 18, p. 4 25.

5C 3 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5C 2. Estimated National Costs of Erosion and Sediment Controls Alternative Baseline Scenario ( No Phase II Compliance) ( $ 1997 millions, pre tax)

Option National Costs by Type of Construction ( $ millions)

Total Single Family Multifamily Commercial Industrial 1 $ 64.6 $ 39.3 $ 413.4 $ 22.0 $ 539.3 2 $ 161.9 $ 86.8 $ 612.3 $ 29.3 $ 890.3 3 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 Source: EPA estimates based on the methodologies presented in Chapter Four.

Table 5C 3. Social Costs and Benefits Erosion and Sediment Controls Alternative Baseline Scenario ( No Phase II Compliance) ( $ 1997 millions, pre tax)

Option Installation, Design and Permitting Operation and Maintenance Government Costs Deadweight Loss Total Social Costs Total Benefits a 1 $ 539.3 $ 0.0 $ 0.0 $ 0.1 $ 539.4 $ 9.7 2 $ 842.4 $ 48.0 $ 0.3 $ 0.4 $ 891.1 $ 20.6 3 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 a Benefits do not include benefits of Phase II rule. Source: EPA estimates based on the methodologies presented in Chapter Four.

5C. 2.2 Economic Impacts EPA assessed the economic impacts under the alternative baseline using a similar approach to that described in Chapter Four of the draft Economic Analysis ( EA) . The impacts on key financial ratios were assessed for model projects and model firms. The model firm impact analysis was then extended to estimate the number of firm closures and the associated employment losses.

5C. 2.2.1 Analysis of Impacts on Model Projects EPA assessed the impacts of the combined costs of the Phase II and proposed effluent guidelines requirements on model projects using the same approach described in Section 4.2. EPA developed a series of model C& D projects and flowed the incremental costs through these models to assess the impacts on project viability. The model project scenarios were analyzed under the alternative assumptions of 100 5C 4 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 percent cost pass through ( the end consumer bears all of the cost) and zero cost pass through ( the developer builder bears all of the cost) . In the former case the impacts are reflected in a higher price for the finished product ( home, apartment, commercial or industrial building) while in the latter case the impacts are reflected in reduced profits to the builder developer.

Table 5C 4a shows the combined impact of the Phase II and proposed effluent guidelines costs on model project financials under the 100 percent cost pass through scenario. Table 5C 4b shows the same impacts under the zero percent cost pass through scenario.

Table 5C 4a. Impact of Combined Phase II and Proposed Effluent Guidelines Costs on Model Project Financials   100 Percent Cost Pass Through and 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% 0.47% 0.00% 0.26% 0.00% 0.24% 0.00% 0.37%

2 0.00% 0.44% 0.00% 0.24% 0.00% 0.22% 0.00% 0.34%

3 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Source: EPA estimates based on the methodologies presented in Chapter Four.

Table 5C 4b. Impact of Combined Phase II and Proposed Effluent Guidelines Costs on Model Project Financials   Zero Cost Pass Through and All Project Sizes Option Percent Change in Builder Developer Profit Single Family Multifamily Commercial Industrial Min Max Min Max Min Max Min Max 1 0.00%  4.60% 0.00%  2.35% 0.00%  2.13% 0.00%  3.36%

2 0.00%  4.23% 0.00%  2.15% 0.00%  1.96% 0.00%  3.09%

3 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Source: EPA estimates based on the methodologies presented in Chapter Four.

5C 5 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 For Option 1, under the alternate baseline, the maximum percent change in project cost to the buyer ranges from 0.24 percent ( commercial project) to 0.47 percent ( single family project) . This is higher than the range of maximum impact given in Table 5 2a of the draft EA, Chapter 5 ( 0.02 percent for a commercial project to 0.04 percent for a single family project) .

Impacts on builder profits are also greater under the alternate baseline assumption. As shown in Table 5C 4b, the maximum impacts range from  4.60 percent for a single family project under Option 1,

up to  1.96 percent for a commercial project under Option 2. This is 2 to 3 percent higher than the impacts shown in Chapter 5 of this EA, Table 5 2b, where the maximum impact ranges from  0.17 percent for a commercial project up to  0.80 percent for a single family project.

5C. 2.2.2 Analysis of Impacts on Model Establishments In Section 4.3 EPA developed a series of model firms based on composite industry financial data collected by Dun & Bradstreet ( D& B 2000) . For single family and multifamily housing EPA constructed one model for each starts size class while for commercial and industrial construction there is a single model firm. EPA examined the impact of the regulatory costs on model firm financial performance by analyzing changes in key financial ratios as the annual regulatory costs are absorbed into the model firm   s financial statement. Complete details on the methodology can be found in Chapter Four, Section 4.3 of this economic analysis.

Under this baseline scenario some firms will be impacted to a greater extent than others because they operate on sites subject to the Phase II storm water requirements and in jurisdictions that have not yet fully implemented the Phase II requirements. As a result, the baseline financial conditions for these firms used in the economic analysis may not fully reflect adjustments necessary to meet the Phase II requirements. To address this, EPA has analyzed the impacts associated with meeting the combined requirements of Phase II and the C& D effluent guidelines.

As noted above, the Phase II rules apply to construction sites greater than one acre and less than five acres in size. EPA currently lacks information on how frequently firms operate on sites that fall within this size range. As a result, EPA cannot present reliable data on the extent to which firms might 5C 6 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 be subject to both the Phase II requirements and the proposed effluent guidelines requirements. At one extreme there may be firms that operate only on sites greater than five acres. Such firms are likely be already compliant with the existing Phase I requirements and thus would face only the incremental requirements associated with the proposed effluent guidelines. On the other extreme are firms that may operate exclusively on sites between one and five acres in size and in jurisdictions that have not fully implemented the Phase II requirements. These firms would incur the combined costs of the Phase II and proposed effluent guidelines Option 1 requirements on 100 percent of their projects. In between there will be firms who operate only part of the time on sites subject to the combined Phase II and proposed effluent guidelines requirements.

Insufficient data is available to allow EPA to develop a distribution of firms by the extent of exposure to both the Phase II requirements and the proposed effluent guidelines requirements. As a result, EPA has modeled this baseline scenario only for firms with 100 percent exposure to both sets of requirements. This represents an absolute worst case scenario in terms of potential impacts. EPA expects that only a small proportion of the industry would actually be represented by this model firm scenario.

Table 5C 5 shows the impact of the combined Phase II and proposed effluent guidelines compliance costs on model firm financial ratios under the zero cost pass through assumption ( i. e. , the firm absorbs 100 percent of the compliance costs) .

Table 5C 5. Impact of Combined Phase II and Proposed Effluent Guidelines Costs on Model Firm Financials   Zero Cost Pass Through Option Percent Change in Financial Ratios From Baseline Gross Profit Return on Net Worth Current Ratio Debt to Assets Min Max Min Max Min Max Min Max Single family Residential 1 0.00%  2.40% 0.00%  27.04% 0.00%  0.21% 0.00% 0.96% 2 0.00%  2.20% 0.00%  24.83% 0.00%  0.20% 0.00% 0.88% 3 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Multifamily Residential 1 0.00%  1.73% 0.00%  5.57% 0.00%  0.30% 0.00% 1.15% 2 0.00%  1.59% 0.00%  5.11% 0.00%  0.27% 0.00% 1.06% 3 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Source: EPA estimates based on the methodologies presented in Chapter Four.

5C 7 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 For Option 1, the largest impacts generally occur in the multifamily sector. Percent change in gross profit for the single family sector ranges from  2.20 percent to  2.40 percent. Under the initial baseline, the range was from  0.23 percent to  0.52 percent. For the multifamily residential sector, the change in gross profit ranges from  1.59 percent to  1.73 percent. The change in gross profit for the multifamily sector is also higher under the alternate baseline than under the initial baseline assumption.

Change in gross profit from the initial baseline was from  0.31 percent to  0.95 percent.

The current ratio shows the least change from baseline of all four financial ratios in both sectors.

The maximum percent change in current ratio for the single family sector ranges from  0.20 percent to

0.21 percent. Under the initial baseline, these impacts were lower, ranging from  0.02 percent to  0.05 percent. For the multifamily sector the change ranges from  0.27 percent to  0.30 percent. Again, impacts were less severe under the initial baseline assumption, where change in current ratio for the multifamily sector ranged from  0.05 percent to  0.16 percent.

As with the analysis in the EA, the largest impacts over all model firm financials under the alternate baseline is on the return on net worth. Here, the percent change from baseline ranges from  24.83 percent to  27.04 percent in the single family sector and from  5.11 percent to  5.57 percent in the multifamily sector ( both under zero cost pass through) . Under the initial baseline, change in return on net worth ranges from  2.54 percent to  5.85 percent for single family and from  0.99 percent to  3.07 percent for multifamily.

Incremental impacts on debt to assets ratios ( also called the debt to equity ratio) for the single

family sector range from 0.88 percent to 0.96 percent. Under the initial baseline, change in the debt to

assets ratio in this sector range from 0.21 percent to 0.90 percent. For the multifamily sector, the percent change in debt to assets ratio over baseline ranges from 1.06 percent to 1.15 percent. The impacts under the initial baseline for this sector range from 0.20 percent to 0.64 percent.

5C 8 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 5C. 2.2.3 Analysis of Impacts on Closures and Employment Losses EPA examined the potential impact of the combined Phase II and proposed effluent guidelines requirements on closures and employment losses using the general approach developed in Section 4.3.2.

The approach is based on the model firm analysis presented in the section above. EPA estimated the change in the number of firms considered financially   stressed   ( ( and their employment) as a result of the regulatory action by examining key financial ratios with and without the compliance cost impacts. The financial stress indicators were used to identify firms that could potentially shut down and close as a result of the regulatory action.

As explained above, EPA lacks reliable data on the distribution of firms by extent of exposure to the Phase II requirements. Although key information on the exposure of firms to the combined effect of Phase II and the proposed effluent guidelines was not available, EPA developed closure estimates for the single family and multifamily homebuilding sector only by making a number of assumptions. 2 First, EPA assumed that the firms most likely to operate on sites subject to the Phase II requirements ( i. e. , sites between one and five acres in size) are those in the 5 9 and 10 24 starts per year class. 3 At the national average lot size of 0.31 acres this translates to disturbance of between 1.55 and 7.44 acres. EPA further assumed that all of the activities of firms in these size classes takes place on sites between 1 and 5 acres in size. 4 2 EPA has a distribution of establishments by starts size class for the single family and multifamily sectors only and therefore could not conduct the same analysis for the commercial and industrial sector.

3 These establishments represent 35 percent of all establishments and account for 21 percent of new single family homes. See Table 2 20. Builders in the 1 4 starts class ( accounting for 43 percent of establishments and 7 percent of starts) were already assumed to build predominantly on sites under 1 acre in size and thus will not be impacted by the proposed rule requirements. See Sections 2.34 and 2.35.

4 The next largest starts class is between 25 and 99 units. This translates to between 7.5 and 33 acres disturbed. EPA judged that at this size class and above it was unlikely that firms would operate solely or predominantly on sites between 1 and 5 acres in size.

5C 9 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 The closure analysis is thus based on the following:

  The combined Phase II and effluent guidelines costs are applied to establishments in the 5 9 and 10 24 starts class located in states without equivalent Phase II programs at the time of promulgation of the Phase II rules.

  The analysis assumes all activities of firms in these starts classes in affected states are subject to the combined compliance costs of Phase II and the effluent guideline.

  The costs per acre for the effluent guidelines only are applied to remaining establishments ( i. e. , those in the 25+ starts size classes) in these states and to all establishments in all other states.

  Closures and employment losses are calculated under the zero cost pass through assumption.

Tables 5C 6 and 5C 7 present the results of the closure analysis. Table 5C 6 shows the estimated closures for the single family and multifamily sectors under the alternate baseline. Table 5C 7 shows the estimated employment losses for the single family and multifamily sectors under the alternate baseline.

As shown in the tables below, EPA has estimated that approximately 16 single family businesses ( 0.02 percent of all potentially affected single family businesses) , and 4 multifamily businesses ( 0.09 percent of potentially affected multifamily businesses) , will be subject to possible closure due to the proposed rule. Under the initial baseline, EPA estimated that 13 single family businesses and 3 multifamily businesses would be subject to closure.

EPA has estimated employment losses with the alternative baseline to be approximately 230 for the single family and multifamily sectors ( less than one half of one percent of potentially affected employees in these two sectors) . Under the initial baseline, EPA estimated employment losses of approximately 206 for both sectors.

5C 10 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5C 6. Estimated Facility Closures Alternate Baseline Zero Cost Pass Through Option Single Family Multifamily TOTAL Number Pct. of Total Number Pct. of Total Number Pct. of Total 1 12 0.014% 2 0.043% 14 0.057%

2 16 0.019% 4 0.087% 20 0.106%

3 0 0.000% 0 0.000% 0 0.000%

Source: EPA estimates based on the methodologies presented in Chapter Four.

Table 5C 7. Estimated Employment Losses Alternate Baseline Financial Ratio Method Zero Cost Pass Through Option Single Family Multifamily TOTAL Number Pct. of Total Number Pct. of Total Number Pct. of Total 1 64 0.019% 18 0.051% 82 0.070%

2 162 0.048% 65 0.185% 227 0.233%

3 0 0.000% 0 0.000% 0 0.000%

Source: EPA estimates based on the methodologies presented in Chapter Four.

5C. 2.2.4 Analysis of Impacts on the National Construction Market The Phase II baseline scenario adds the same costs per acre to each type of construction. The impact on each type of construction is a weighted average of the number of acres subject to the Phase II regulation. The incremental costs to bridge the gap between the Phase II baseline and the initial baseline are also the same across policy options. Thus, assessing this baseline scenario is unlikely to change the rank order of costs among policy options but merely demonstrate larger impacts by including all recent EPA C& D regulation rather than showing only the effects of the proposed effluent guidelines.

5C 11          Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5C 8 repeats the affordability assessment from the initial baseline analysis. It shows the worst case scenario in which the Phase II alternative baseline applies to all regulated construction sites.

The impacts are considerably larger than under the standard baseline. The most costly option decreases the number of families that could have afforded the model home by 0.21 percent. This is slightly more than the 0.15 percent cut estimated under the standard baseline.

Table 5C 8. Impact of Erosion and Sediment Control Costs on Housing Affordability Alternative Baseline Scenario ( No Phase II Compliance) ( $ 1997 millions, pre tax) .

Option Storm Water Control Costs Per Lot Change in Costs per Unit Income Needed to Qualify Change in Income Needed Number of Households Shifted ( thousands) Percent of Households Shifted That Could Afford Baseline 1 $ 62 $ 112 $ 82,503 $ 32  16  0.08%

2 $ 153 $ 277 $ 82,551 $ 79  40  0.21%

3 $ 0 $ 0 $ 82,472 Source: EPA estimates based on the methodologies presented in Chapter Four.

The changes in output and employment are considerably greater under the alternative baseline.

Table 5C 9 shows that under the more costly Option 2, construction related impacts decrease employment by 7,800 jobs. The stimulus effect of the regulation increases employment by a more than offsetting 19,410 jobs. The change in consumer spending, however, causes a job loss of 12,900 jobs in all industries nationwide. This is half again as large as the job losses from consumer spending estimated under the original baseline for Option 2 ( 8,640 jobs) . Table 5C 9 shows a net employment loss of 1,300 under Option 2. This is about the same as the net employment effect under the initial baseline ( 1,440 jobs)

Clearly, the estimated impact of the proposed rule depends on which baseline is considered more appropriate.

5C 12 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5C 9 Changes in Output and Total Employment from the Alternate Baseline ( $ 1997)

Option Comb. 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 Consumer Spending ( Jobs) Net Change in Total Employment ( Jobs) Single family 1 ( 30) 67 ( 1,101) 2,477 1,376 ( 1,616) ( 241)

2 ( 74) 165 ( 2,732) 6,147 3,414 ( 4,012) ( 598)

3 0 0 0 0 0 0 0 Multifamily 1 ( 4) 10 ( 136) 354 218 ( 260) ( 41)

2 ( 8) 21 ( 293) 772 479 ( 567) ( 88)

3 0 0 0 0 0 0 0 Commercial 1 ( 50) 143 ( 1,840) 5,319 3,478 ( 3,569) ( 90) 2 ( 102) 295 ( 3,789) 10,965 7,176 ( 7,361) ( 185)

3 0 0 0 0 0 0 0 Industrial 1 ( 14) 21 ( 520) 779 259 ( 478) ( 219)

2 ( 27) ( 41) ( 1,019) 1,527 508 ( 940) ( 432)

3 0 0 0 0 0 0 0 Total 1 ( 97) 240 ( 3,597) 8,928 5,332 ( 5,923) ( 591)

2 ( 211) 522 ( 7,833) 19,410 11,577 ( 12,880) ( 1,303)

3 0 0 0 0 0 0 0 Source: EPA estimates based on the methodologies presented in Chapter Four.

5C 13 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 5C. 3 REFERENCES Dun & Bradstreet. 2000. 1999 2000 Industry Norms and Key Business Ratios.

ENR. 2001. ENR Construction Cost Index. Engineering News Record. Available at: http: / / www. enr. com/ cost/ costcci. asp. Accessed on December 17, 2001.

U. S. EPA. 1999. Economic Analysis of the Final Phase II Storm Water Rule. U. S. Environmental Protection Agency.

5C 14 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 CHAPTER SIX INITIAL REGULATORY FLEXIBILITY ANALYSIS 6.1 INTRODUCTION TO THE INITIAL REGULATORY FLEXIBILITY ANALYSIS This section considers the effects that the proposed C& D regulations would have on small entities 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 requires an agency to prepare an initial regulatory flexibility analysis ( IRFA) 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.   1 Small entities include small businesses,

small organizations, and governmental jurisdictions.

For this proposed rulemaking, EPA conducted outreach to small businesses, convened a Small Business Advocacy Review ( SBAR) panel, and prepared an IRFA. 2 The IRFA is detailed in this section and represents EPA   s assessment of the impacts of the proposed regulations on small businesses in the C& D industries. The analysis is presented as follows:

C Section 6.2 outlines EPA   s initial assessment of small businesses in the industries affected by the proposed regulations.

C Section 6.3 presents EPA   s analysis ( i. e. , IRFA) and summarizes the steps taken by EPA to comply with the RFA.

1 The preparation of an IRFA for a proposed rule does not legally foreclose certifying no significant impact for the final rule ( USEPA, 1999) .

2 This analysis or a summary of the analysis must be published in the Federal Register at the time of publication of a proposal.

6 1 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 C Section 6.4 presents the data, methodology, and results of EPA   s analysis of impacts to small businesses for this rulemaking.

6.2 INITIAL ASSESSMENT EPA has determined that the proposed C& D regulations are subject to notice and comment rulemaking requirements. EPA has developed a profile of the C& D industry that includes all potentially affected operations as well as small businesses. This information is provided in Chapter Two and also in Chapters Four and Five of this EA. Much of the profile information covered in these sections applies to small businesses. Additional information on small businesses in the C& D industry is provided in Sections 6.2 and 6.3 of this chapter. EPA   s assessment concludes that the proposed rule may affect small entities and the proposed rule would have an adverse economic impact on small entities.

Section 6.2.1 reviews the SBA definitions of small entities in the C& D industry. Section 6.2.2 then uses the definitions of small entities laid out in Section 6.2.1 to estimate the number of operations that meet this small business definition.

6.2.1 Definition of Affected Small Entities The RFA defines a   small entity   as a small not  for profit organization, small governmental jurisdiction, or small business. EPA expects that the principal impact of the C& D regulations on small entities will fall on ( 1) small businesses that undertake C& D activities and ( 2) small governmental units involved in permitting C& D activities. With respect to the first of these categories, the majority of C& D activity in the United States is undertaken by private businesses, hence the small entity analysis will focus on small businesses engaged in C& D activities. 3 With respect to the second category of impact,

permitting activity is undertaken exclusively by governmental units ( at various levels of government) ,

hence this part of the analysis will focus on the impacts on small government units.

3 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 2 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 The RFA requires ( with some exception) that EPA define   small   businesses according to the size standards established by the Small Business Administration ( SBA) . SBA establishes criteria for identifying small businesses based on either the number of employees or annual revenues ( 13 CFR 121) . 4 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 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 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.

4 Employees counted in determining size includes 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.

6 3 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 6 1. SBA Small Business Definitions for the Construction and Development 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) ; Small Business Administration 1998: Firm Size Data ( see http: / / www. sba. gov/ advo/ stats/ data. html)

6.2.2 Number of Small Businesses Affected The number of small businesses affected by the proposed rule was estimated through a series of steps. First, EPA estimated the number of establishments in the affected industries. From the number of establishments, EPA then estimated the number of businesses ( or firms) affected. Finally, EPA estimated the number of small businesses affected.

6 4 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 <IP_ADDRESS> Number of Establishments Affected The first step in the small entity analysis is to determine the number of establishments affected.

EPA developed estimates of the number of potentially affected establishments in Chapter Two ( see Table 2 14. ) The estimate of 148,553 potentially affected businesses was obtained after subtracting 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 who were judged unlikely to disturb more than one acre of land on a regular basis. Table 2 14 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.

For the small entity analysis, EPA was unable to include all of the establishments potentially affected as shown in Table 2 14. In particular, EPA has not included special trades ( NAICS 235) in its small entity analysis because the financial data upon which the small entity analysis is based is not available for these industries. EPA does not believe, however, that a substantial number of entities in these industries are NPDES storm water permittees or co permittees and would therefore not be subject to the proposed rule requirements.

The final distribution of potentially affected establishments used in the small entity analysis is shown in Table 6 2. The total number of establishments potentially affected by the proposed rule is 128,782 under Option 1. This is the figure upon which the small business analysis is based.

6 5 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 6 2. Number of Affected Establishments in the Construction and Development Industry NAICS Industry Option 1 Option 2 Number Percent of Total Number Percent of Total 23321 Single family residential building construction 34,070 26.5% 21,362 18.7%

23322 Multi family 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 67.0% 114,170 100.0%

Totals may not add due to rounding. Source: U. S. Census Bureau ( 2000a) and EPA estimates. See also Chapter Two, Table 2 14.

<IP_ADDRESS> Number of Businesses Affected In order to estimate the number of businesses affected by the proposed rule, EPA first examined the ratio of businesses to establishments from SBA ( 1998) data. 5 Table 6 3 shows these ratios.

5 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.

6 6 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 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: SBA ( 1998) .

As seen, the ratio of businesses to establishments is almost one to one for all establishments with fewer than 100 employees. With the exception of NAICS 23331 ( manufacturing and industrial construction) , the ratio of businesses to establishments is significantly lower for establishments employing 100 or more workers. Table 6 4 applies these percentages to the total number of establishments in the four industries to estimate the number of businesses. 6 The overall ratio of businesses to establishments for each industry was then applied to the number of potentially affected establishments within each industry. To illustrate, for the single family residential construction industry,

the estimate of potentially affected businesses is based on the following calculation:

( adjusted no. of affected establishments) * ( total businesses/ total establishments) = affected businesses ( 34,070) * ( 138,732/ 138,850) = 34,041 potentially affected businesses The number of potentially affected businesses was calculated in the same manner for the remaining industries.

6 The table also shows average revenues per establishment. These results are used in the next step to determine the number of small businesses affected.

6 7 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 6 4. Estimated Number of Businesses by Employment Class, and Revenues per Establishment Employment Class Number of Establishments Ratio of Businesses to Establishments Estimated Number of Businesses Estimated Number of Establishments Owned by Multifacility Businesses Revenues per Establishment ( x $ 1,000)

Single Family Housing Construction ( NAICS 23321)

1 to 4 106,985 1.000 106,985 0 $ 412 5 to 9 21,377 1.000 21,372 5 $ 1,299 10 to 19 7,234 0.999 7,227 7 $ 2,991 20 to 99 1 3,022 0.993 2,999 23 $ 12,073 100 to 499 2 222 0.661 147 75 $ 75,923 500+ 3 10 0.203 2 8 $ 174,764 Subtotal 138,850 0.999 138,732 118 $ 1,760 Multifamily Housing Construction ( NAICS 23322)

1 to 4 4,725 1.000 4,725 0 $ 383 5 to 9 1,456 0.999 1,455 1 $ 1,474 10 to 19 782 1.000 782 0 $ 3,612 20 to 99 1 532 0.994 529 3 $ 10,692 100 to 499 2 46 0.884 41 5 $ 40,855 500+ 3 3 0.540 2 1 $ 122,949 Subtotal 7,544 0.999 7,534 10 $ 1,070 Manufacturing and Industrial Building Construction ( NAICS 23331)

1 to 4 3,136 1.000 3,136 0 $ 459 5 to 9 1,666 1.000 1,666 0 $ 1,529 10 to 19 1,261 0.999 1,260 1 $ 2,926 20 to 99 1 991 0.997 988 3 $ 10,891 100 to 499 2 195 0.973 190 5 $ 46,414 500+ 3 30 0.558 17 13 $ 217,247 Subtotal 7,279 0.997 7,257 22 $ 4,682 Commercial and Institutional Building Construction ( NAICS 23332)

1 to 4 17,722 1.000 17,718 4 $ 467 5 to 9 7,644 1.000 7,643 1 $ 1,490 10 to 19 5,861 0.998 5,850 11 $ 3,434 20 to 99 1 5,518 0.991 5,470 48 $ 12,663 100 to 499 2 637 0.821 523 114 $ 77,162 500+ 3 48 0.327 16 32 $ 342,102 Subtotal 37,430 0.994 37,220 210 $ 437,317 Heavy Construction ( NAICS 23411)

1 to 4 4,154 0.9997 4,153 1 $ 281 5 to 9 1,987 0. . 9995 1,986 1 $ 939 10 to 19 1,876 0.9966 1,870 6 $ 1,998 20 to 99 1 2,683 0.9907 2,658 25 $ 7,124 100 to 499 2 544 0.8601 468 76 $ 35,823 500+ 3 26 0.2153 6 20 $ 118,810 Subtotal 11,270 0.9886 11,141 129 $ 4,301 Source: Census ( 2000) ; SBA ( 1998) . 1 Combined data from Census 20 to 49 and 50 to 99 employment classes. 2 Combined data from Census 100 to 249 and 250 to 499 employment classes. 3 Combined data from all Census employment classes of more than 500 employees.

6 8 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 <IP_ADDRESS> Number of Small Businesses Affected To determine the number of potentially affected small businesses, the number of potentially affected businesses was multiplied by the ratio of small businesses to total businesses. To estimate the number of small businesses, EPA examined the distribution of revenues per establishment by size of establishment ( see last column of 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 above 100 employees consistently exceed the SBA threshold. 7 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. Table 6 5 shows the results of this review. EPA estimates there are 95,753 potentially affected businesses ( representing 98.6 percent of all potentially affected businesses) that fall below the SBA defined revenue threshold and that therefore may be considered   small   businesses. .

7 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.

6 9 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 6 5. Estimated Number of Small Businesses Potentially Affected by the Proposed Rule.

NAICS Potentially Affected Establishments Potentially Affected Businesses Potentially Affected Small Businesses Small Businesses as a Percent of Total for Individual Industry Number Percent of total 233210: Single family housing construction 34,070 34,041 34,004 35.5% 99.9%

233220: Multifamily housing construction 4,603 4,597 4,571 4.8% 99.4%

233310: Manufacturing and industrial building construction 7,742 7,719 7,498 7.8% 97.1%

233320: Commercial and institutional building construction 39,810 39,587 39,013 40.7% 98.6%

23411 Heavy construction 11,270 11,141 10,667 11.1% 95.7%

Total 97,495 97,085 95,753 100.0% 98.6%

Source: EPA estimates based on methodologies presented in this chapter and in Chapter Four.

6.3 EPA COMPLIANCE WITH RFA REQUIREMENTS 6.3.1 Outreach and Small Business Advocacy Review In accordance with section 609( b) of the RFA, as amended by SBREFA, EPA convened a Small Business Advocacy Review ( SBAR) Panel for the proposed rule. The Panel was convened on July 16,

2001. Panel participants included representatives from EPA, the Office of Information and Regulatory Affairs within the Office of Management and Budget ( OMB) , and the Office of Advocacy of the Small Business Administration ( SBA) .   Small Entity Representatives   ( ( SERs) , who advised the Panel,

included small homebuilders and commercial builders. Throughout the development of these regulations, EPA conducted outreach to small businesses in the C& D industries. EPA held several informational public meetings in 1999 and again in 2001 to provide the public and those in potentially affected C& D industries to learn more about the proposed rule and to voice their questions and concerns.

6 10 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 In addition, several half day focus group sessions were conducted with members of the National Association of Home Builders ( NAHB) in early 2001.

Consistent with the RFA/ SBREFA, the Panel evaluated the assembled materials and small entity comments on issues related to the elements of the IRFA. The Panel   s activities and recommendations are summarized in the 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 ( USEPA, 2001) , or   Panel Report.   This document is included in the public record.

6.3.2 EPA   s Initial Regulatory Flexibility Analysis As required by Section 603 of the RFA, as amended by SBREFA, EPA has conducted an initial regulatory flexibility analysis. The IRFA includes a discussion of the problems the proposed rule will solve, as well as the objectives and legal basis for the proposal. The IRFA also includes a description and estimate of the following:

C Number of small businesses that will be affected;

C The reporting, recordkeeping, and other compliance requirements of the proposed rule;

C Any Federal rules that may duplicate, overlap, or conflict with the proposed rule;

C Any significant regulatory alternatives to the rule that would accomplish the stated objectives of the applicable statutes and minimize impacts to small businesses.

This section addresses each of these requirements of the IRFA that EPA has prepared to support the proposed C& D regulations.

Section 607 of the RFA further notes that the Agency is to   provide either a quantifiable or numerical description of the effects of a proposed rule or alternatives to the proposed rule, or more general descriptive statements if quantification is not practicable or reliable.   For this rulemaking, EPA has prepared an economic analysis of the impacts to small C& D businesses. This analysis is provided in 6 11 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Section 6.4. Additional information and the detailed results of this analysis are presented in Section 6.4.2.

<IP_ADDRESS> Reasons EPA is Considering the Proposed Rule EPA is proposing effluent limitation guidelines ( ELG) for the C& D industry under a settlement agreement with the Natural Resources Defense Council ( NRDC) . The ELG is an effort to establish performance standards for construction and development projects during active and post construction phases. This rulemaking is being proposed under Title III of the Clean Water Act ( CWA) , and was outlined in the Phase II NPDES storm water Final Rule ( 64 FR 68741) as the next step in the development of the framework of the storm water program. While construction activities disturbing five acres or more land are already subject to NPDES permits and the requirements set forth in EPA   s construction general permit ( CGP) , these permits do not generally contain technology based requirements for design, inspection, or maintenance of erosion and sediment control ( ESC) best management practices ( BMPs) . The current regulations require permittees to develop a storm water pollution prevention plan ( SWPPP) and in that plan to describe any ESCs they will use. The existing regulations do not require that permittees use particular ESCs; actual ESC selection and design is the responsibility of the permittee in conformance with any existing state and local requirements. State and local requirements for ESC design, inspection, and maintenance criteria, if present, vary widely. The purpose of this rule is   to establish nation wide criteria to support builders and local jurisdictions in appropriate BMP selection   ( 64 FR 68741) .

<IP_ADDRESS> Objectives and Legal Basis for the Proposed Rule Construction and development ( C& D) activity affecting water quality typically involves site selection and planning, and land disturbing tasks during construction such as clearing, excavating and grading. Disturbed soil, if not managed properly, can be easily washed off site during storm events.

Storm water discharges generated during construction activities can cause an array of physical, chemical and biological impacts. Water quality impairment may result, in part, because a number of pollutants are 6 12 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 preferentially absorbed onto mineral or organic particles found in fine sediment. The interconnected process of erosion ( detachment of the soil particles) , sediment transport, and delivery is the primary pathway for introducing pollutants from construction sites into aquatic systems. A primary concern at most construction sites is the erosion and transport process related to fine sediment because rain splash,

rills ( small channels typically less than one foot deep) and sheetwash ( thin sheets of water flowing across a surface) encourage the detachment and transport of this material to water bodies. Although streams and rivers naturally carry sediment loads, erosion from construction sites and runoff from developed areas can elevate these loads to levels above those in undisturbed watersheds.

Existing national storm water regulations require construction site operators to outline controls to manage construction site runoff, but do not require any specific level of control. One of the options being proposed ( Option 2) would establish effluent limitation guidelines in the form of minimum standards for design and implementation of erosion and sediment controls used during the active phase of construction. This approach would cover sites with five or more acres of disturbed land, and would establish minimum requirements for conducting site inspections and providing certification as to the design and completion of various aspects of those controls.

EPA acknowledges that many State and local governments have existing standards for temporary controls. The proposed rule is intended to work in concert with existing requirements where equivalent,

and would not supercede more stringent requirements. In addition, EPA is proposing two alternatives that would not set national standards for control of storm water discharges from construction sites subject to permit requirements under section 402 of the CWA. Both of these approaches would rely instead on a combination of existing State and local requirements and additional requirements based on the best professional judgement ( BPJ) of the permitting authority. Under one of these alternatives ( Option 1) , the proposal would establish minimum requirements for conducting site inspections and providing certification as to design and completion of controls required by the permit authority in its NPDES permit. These requirements are similar to the inspection and certification requirements in Option 2.

Existing compliance determination practices for construction site storm water controls rely principally on site inspections by local governments, however, enforcement efforts are reported to be uneven nationwide, largely due to limited enforcement resources at the Federal, State and local levels. The 6 13 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 inspection and certification requirements in today' s proposed rule could strengthen the current permit program.

Under another alternative ( Option 3) , no new requirements would be established under this option. Both the control requirements and the certification requirements would be left to the best professional judgement of the permitting authority in order to allow them to be better tailored to local conditions. These proposed options are discussed in more detail in sections IX and X of today' s notice.

At this time, EPA is co proposing all three options because it sees advantages to each.

This rulemaking is being proposed under Title III of the Clean Water Act ( CWA) , specifically under the authorities of sections 301, 304, 306, 307, 308, 402 and 501 of the Clean Water Act. Further legal basis for this proposed rule may be found in 33 U. S. C. sections 1311, 1314, 1316, 1317, 1318,

1342 and 1361 and under authority of the Pollution Prevention Act of 1990, 42 U. S. C. 13101 et seq. , Pub L. 101 508, November 5, 1990. Chapter One of this report and the preamble to the proposed rule contain more detailed information on the objectives and basis for this proposed rule.

<IP_ADDRESS> Description and Estimate of Number of Small Entities Affected As presented in Table 6 5, EPA estimates that there are about 97,085 potentially affected C& D businesses nationwide in the four industries discussed in this chapter, of which 95,753 ( 98.6 percent) are small businesses. 8 Approximately 40 percent of the small businesses are in the commercial and institutional building construction industry and 35 percent are in the single family residential construction industry. Heavy construction accounts for 11 percent of small C& D businesses,

manufacturing and industrial building construction accounts for 8 percent, and multifamily residential construction accounts for 5 percent.

8 The businesses shown in Table 6 5 excludes those representing 19,771 establishments in Special Trades Contracting ( NAICS 235) that are potentially affected by the proposed rule ( see Table 2 14) , but were not analyzed in this chapter because the financial data upon which the small entity analysis is based is not available for these industries. EPA does not believe, however, that a substantial number of entities in these industries are NPDES storm water permittees or co permittees, and would therefore generally not be subject to the proposed rule requirements.

6 14 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 <IP_ADDRESS> Description of Proposed Recordkeeping, Reporting, and Other Requirements The proposed C& D regulations contain recordkeeping and reporting requirements for entities in the C& D industry. In Chapter Five, EPA estimated the costs associated with the additional requirements imposed on C& D establishments as a result of the proposed rule. This section focuses specifically on the costs and burden associated with recordkeeping, reporting and related requirements.

For the purpose of this analysis,   burden   means the total time, , effort, or financial resources expended by persons to generate, maintain, retain, or disclose or provide information to or for a federal agency. This includes the time needed to review instructions; develop, acquire, install, and utilize technology and systems for the purposes of collecting, validating, and verifying information, processing and maintaining information, and disclosing and providing 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; and transmit or otherwise disclose the information.

EPA estimated that states would incur some costs related to implementation of the proposed rule.

Specifically, general permit development and implementation of the inspection and certification provisions 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 storm water NPDES permit programs are fully implemented. Any new regulatory requirements will be incremental to the costs of these programs. The analysis in Chapter Five concluded that once Phase I and Phase II are fully implemented by communities, the proposed rule will not add any additional burden to government units.

The current NPDES storm water permitting authority defaults to the state level except where places are large enough to qualify as Phase I ( medium and large MS4) or Phase II ( small MS4)

communities. Since permitting authority, and thus permitting costs, will affect only Phase II or larger 6 15 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 communities, and since EPA   s analysis indicates no incremental impacts to Phase II or larger communities, EPA does not expect smaller government units to be adversely impacted by the proposed rule. Therefore no additional analysis was conducted to assess the impacts of the proposed rule on small government entities.

A significant new requirement for construction firms contained in both Option 1 and Option 2 would 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 record keeping 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 subject to Option 1, the annual cost of the site log requirement is $ 32.07 million. This is the largest portion of the inspection costs discussed in Chapter Five. Since Option 2 excludes firms disturbing less than five acres each year from the site log requirement, the total costs of this requirement to small business will be reduced.

<IP_ADDRESS> Identification of Relevant Federal Rules That May Duplicate, Overlap, or Conflict with the Proposed Regulations EPA has analyzed the potential impacts of the proposed rule under the baseline assumption that all C& D activities are in compliance with existing federal and state regulations affecting C& D operations, including Phase I and future Phase II NPDES storm water regulations. Neither EPA nor the Small Business Advocacy Review Panel identified any federal rules that duplicate or interfere with the requirements of the proposed rule ( USEPA, 2001) .

6 16 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 <IP_ADDRESS> Significant Regulatory Alternatives The proposed rule retains the coverage of the Phase II NPDES storm water permitting program,

which excludes construction activities that disturb less than one acre of land. EPA believes that this exclusion alleviates the potential compliance burden for small scale builders who operate independently and who work on very few ( and relatively small) projects in a given year. 9 EPA believes that larger plans of development and individual construction projects that disturb a total of more than one acre are more likely to contribute to increased storm water runoff and erosion problems than activities disturbing less than one acre. In addition, activities disturbing less than one acre are more likely to be dispersed, thus decreasing the concentration of adverse effects.

Additionally, under Option 2 of the proposed rule construction sites disturbing less than 5 acres would be excluded. EPA believes that a substantial share of activity on sites between one and five acres in size may also be undertaken by small scale builders. This broader exclusion, therefore, would potentially reduce compliance burdens for more small scale builders by exempting them from additional requirements.

EPA considered additional options that would, for example, exempt construction activities taking place on sites of ten acres or less. EPA was unable, however, to identify data to suggest that exempting sites under ten acres from the requirements of the proposed rule would produce substantial additional relief to small entities. In fact, EPA found evidence that even the largest home builders operate on sites in this size range ( Otsuji, 2001) .

Waivers for construction activities occurring in areas with low erosion potential remain in place from the Phase II NPDES storm water Final Rule. Under Phase II such waivers may be granted where little or no rainfall is expected during the period of construction. Qualification for this waiver may be determined using the tables of rainfall runoff erosivity ( R) factors published for each region of the U. S.

by the Department of Agriculture ( 64 FR 68774) . In addition, EPA has taken regional climate factors into account throughout the development of this proposed regulation and has built a sizeable amount of 9 Note that as in the Phase II NPDES storm water rule, this exclusion does not apply to development activities disturbing less than one acre that are part of a larger development plan ( 64 FR 68772 68773) .

6 17 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 flexibility into the rule to allow permittees to choose appropriate controls based on their particular site characteristics.

6.4 EPA   S ANALYSIS OF SMALL BUSINESS IMPACTS The following sections describe the methodologies and results for the economic impact analysis of the proposed rule on small businesses in the C& D industry.

6.4.1 Classification of Model Facilities for Impact Analysis For its economic impact analysis, EPA used model facilities based on Census data, however,

these facilities are not identical to the 1997 Census of Construction data. This section describes how EPA applied its analysis of small business owned establishments to the model facilities used in the impact analysis.

In the single family and multifamily housing construction industries, ( NAICS 233210 and 233220, respectively) , EPA used multiple model facilities 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 6 presents key model facility data by starts class.

6 18 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 6 6. Key Model Facility 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.

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.

6 19 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 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 model facilities with fewer than 500 housing starts per year in both the 233210 and 233220 NAICS codes are small business owned establishments, and model facilities 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. 10 To estimate the number of small business owned facilities affected by the proposed C& D effluent guideline, EPA first projected impacts for each model facility and extrapolated those to the establishments represented by the model. If the model facility has fewer than 500 starts per year, then all impacts to establishments represented by that facility are incurred by small businesses; impacts to establishments represented by the model facility for the 500+ starts class are incurred by large business

owned establishments.

In the manufacturing and industrial, commercial and institutional, and heavy construction industries, ( NAICS codes 233310, 233320, and 23411, respectively) , a single model facility was used for the economic impact analysis. Selection of the model facility for each industry was based on median revenue by employment class. Because EPA used a single model facility in each of these industries, it is not appropriate to designate the model facility as owned by a small or large business. Therefore, EPA calculated the percent of establishments that are small business owned, as estimated from the 1997 Census of Construction , and applied that percentage to all impacts to estimate small business impacts.

For example, approximately 97 percent of establishments in NAICS 233310 are small business owned.

10 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 is arranged. SBA sets its definition of   small   by firm revenues. However, the Census data available to EPA is arranged by employment class, not revenues, 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.

6 20 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 If 100 establishments in that NAICS code are projected to incur compliance costs exceeding one percent of revenues, EPA assumes that 97 of those establishments are small businesses.

6.4.2 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 one percent and three percent of revenues.

EPA   s primary tool for projecting revenue test impacts is the model facility. For each model facility, it is straightforward to divide estimated business level compliance costs by model facility revenues. However, that answers only part of the question concerning the impact of the proposed regulation on small business entities. To determine the number and percentage of businesses exceeding the revenue test thresholds, EPA must consider not only the model facility, but the businesses represented by that model as well. The model facility 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 facility   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 facility incurs compliance costs that are less than one percent of revenues, a conclusion that no businesses are affected by the regulation is unwarranted. It is highly likely that other businesses represented by the model have lower revenues and therefore may well incur costs exceeding one percent of revenues.

To address this issue, EPA developed estimates of the statistical revenue distribution of establishments represented by each model facility. 11 EPA then used those distributions to estimate the number and percentage of small business owned establishments in each industry that incur compliance costs exceeding one and three percent of revenues. EPA used model facility revenues for the mean of 11 As described in Section 6.2.2 above, EPA determined that in the construction industry, the small business is essentially identical to the small business owned establishment.

6 21 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 each distribution, but had no direct information concerning the dispersion of establishment income around each model facility. EPA therefore developed the distributions by making reasonable assumptions about the variance and shape of the distribution. In order 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.

<IP_ADDRESS> 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 facility mean of $ 1.0 million in annual revenues. The cumulative distribution function is used to determine the probability y 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,

suppose estimated establishment compliance costs for this model facility class are equal to $ 15,000. Any establishment in this model facility class that earns revenues less than $ 1.5 million will incur compliance costs that exceed one percent of revenues. Thus, EPA would use the cumulative distribution function to estimate the probability that a facility earns revenues of $ 1.5 million or less.

6 22 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Figure 6 1 Baseline Distribution Functions for Facility Revenues 0.00 0.25 0.50 0.75 1.00 $ 0 $ 1,000 $ 2,000 $ 3,000 $ 4,000 Revenues ( x $ 1,000) Probability Unit Normal Lognormal Critical Value 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 one. In Figure 6 1, this is represented by the curve labeled   unit normal.   An implication of the unit normal distribution for this analysis is that some establishments 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 business establishment, negative revenue is not. 12 12 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.

6 23 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 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 establishment revenues may be skewed because it is probable   but infrequent   that some establishments 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 an establishment might earn. Conversely, there is a limit to the minimum revenues even the poorest performing establishments 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.

<IP_ADDRESS> 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 facility from the four major construction industries ( single family, multifamily,

manufacturing and industrial, commercial and institutional) 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 6 24 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 ( normal or lognormal) , EPA calculated the probability that revenues are less than or equal to any given value for each model class. 13 After estimating the compliance costs per establishment for each option, EPA calculated the level of revenues at which the estimated compliance costs would exactly equal one percent and three percent of revenues. EPA then used its two distributions to calculate the probability that establishments have revenues less than or equal to these specified levels. These probabilities provide the range for the percentage of establishments projected to incur compliance costs exceeding the one percent and three percent thresholds. Multiplying these probabilities by the number of establishments in the model class provides the range for the number of establishments projected to incur compliance costs exceeding the one percent and three percent thresholds. Note that EPA chose to truncate the unit normal distribution at zero revenues; EPA calculated the probability that establishments earn revenues equal to the specified one or three percent threshold for incurring impacts. This is 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 establishment earns $ 1 million,

the mean for each distribution. If EPA estimates annual compliance costs of $ 7,500 will be incurred by this business, then any business in this model class earning less than $ 750,000 will incur compliance costs exceeding one percent of revenues, and any business earning less than $ 22,500 will incur compliance costs exceeding three percent of revenues. The   critical value   in Figure 6  1 represents the one percent threshold ( i. e. , revenues of $ 750,000) . Based on the normal distribution, EPA would project that 22 percent of establishments incur costs exceeding the one 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 would project that 54 percent of establishments incur costs exceeding the same threshold. These provide the lower and upper bounds for EPA   s impacts estimates.

13 For calculation purposes, EPA used the @ NORMAL and @ LOGNORMDIST functions in the Lotus spreadsheet program.

6 25 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 6.4.3 Small Business Impact Analysis Results Tables 6 7a and 6 7b present the range of establishments projected to incur compliance costs exceeding one percent and three percent of revenues, respectively, for each proposed ESC option under a zero percent cost pass through assumption. Tables 6 7c and 6 7d present the same results under an estimated cost pass through assumption. In each table, the   A   denotes the results obtained assuming a normal distribution and the   B   indicates the results obtained using the lognormal distribution, , as discussed in Section 6.4.2.

The number of small business owned establishments incurring compliance costs exceeding the revenue threshold is less than one percent for all options and project types under the zero CPT assumption. Impacts under the estimated CPT assumption are even smaller. Under the zero CPT scenario, the number of small businesses with costs exceeding one percent of revenues ranges from a low of 0 to 126 under Option 1 and from a low of 104 to a high of 627 under Option 2 ( Table 6 7a) . The number of businesses with costs exceeding three percent of revenues ranges from a low of 0 to a high of 42 under Option 1 and from a low of 0 to a high of 205 under Option 2 ( Table 6 7b) .

Under the estimated CPT scenario, the number of small businesses with costs exceeding one percent of revenues ranges from a low of 0 to 15 under Option 1 and from a low of 0 to a high of 70 under Option 2 ( Table 6 7c) . The number of businesses with costs exceeding three percent of revenues ranges from a low of 0 to a high of 5 under Option 1 and from a low of 0 to a high of 24 under Option 2 ( Table 6 7d) .

6 26 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 6 7a. Estimated Number of Small Business Owned Establishments With Compliance Costs Exceeding 1 Percent of Revenues Zero Percent Cost Pass Through Option Single family Multifamily Commercial Number Pct. of Small Businesses Number Pct. of Small Businesses Number Pct. of Small Businesses Low High Low High Low High Low High Low High Low High 1 0 47 0.000% 0.138% 0 5 0.000% 0.110% 0 62 0.000% 0.159%

2 40 140 0.118% 0.412% 8 18 0.175% 0.395% 18 234 0.046% 0.599%

3 0 0 0.000% 0.000% 0 0 0.000% 0.000% 0 0 0.000% 0.000%

Option Industrial Heavy TOTAL Number Pct. of Small Businesses Number Pct. of Small Businesses Number Pct. of Small Businesses Low High Low High Low High Low High Low High Low High 1 0 12 0.000% 0.160% 0 0 0.000% 0.000% 0 126 0.000% 0.000%

2 2 36 0.270% 0.480% 36 199 1.863% 0.337% 104 627 0.109% 0.109%

3 0 0 0.000% 0.000% 0 0 0.000% 0.000% 0 0 0.000% 0.000%

Source: EPA estimates based on methodologies presented in this chapter and in Chapter Four.

6 27 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 6 7b. Estimated Number of Small Business Owned Establishments With Compliance Costs Exceeding 3 Percent of Revenues Zero Percent Cost Pass Through Option Single family Multifamily Commercial Number Pct. of Small Businesses Number Pct. of Small Businesses Number Pct. of Small Businesses Low High Low High Low High Low High Low High Low High 1 0 15 0.000% 0.044% 0 2 0.000% 0.044% 0 21 0.000% 0.054%

2 0 45 0.000% 0.133% 0 6 0.000% 0.132% 0 77 0.000% 0.197%

3 0 0 0.000% 0.000% 0 0 0.000% 0.000% 0 0 0.000% 0.000%

Option Industrial Heavy TOTAL Number Pct. of Small Businesses Number Pct. of Small Businesses Number Pct. of Small Businesses Low High Low High Low High Low High Low High Low High 1 0 4 0.000% 0.053% 0 0 0.000% 0.000% 0 42 0.000% 0.044%

2 0 12 0.000% 0.160% 0 65 0.000% 0.607% 0 205 0.000% 0.214%

3 0 0 0.000% 0.000% 0 0 0.000% 0.000% 0 0 0.000% 0.000%

Source: EPA estimates based on methodologies presented in this chapter and in Chapter Four.

6 28 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 6 7c. Estimated Number of Small Business Owned Establishments With Compliance Costs Exceeding 1 Percent of Revenues Estimated Cost Pass Through Option Single family Multifamily Commercial Number Pct. of Small Businesses Number Pct. of Small Businesses Number Pct. of Small Businesses Low High Low High Low High Low High Low High Low High 1 0 7 0.000% 0.021% 0 0 0.000% 0.000% 0 6 0.000% 0.015%

2 0 20 0.000% 0.059% 0 1 0.000% 0.022% 0 24 0.000% 0.061%

3 0 0 0.000% 0.000% 0 0 0.000% 0.000% 0 0 0.000% 0.000%

Option Industrial Heavy TOTAL Number Pct. of Small Businesses Number Pct. of Small Businesses Number Pct. of Small Businesses Low High Low High Low High Low High Low High Low High 1 0 2 0.000% 0.027% 0 0 0.000% 0.000% 0 15 0.000% 0.016%

2 0 6 0.000% 0.080% 0 19 0.000% 0.178% 0 70 0.000% 0.073%

3 0 0 0.000% 0.000% 0 0 0.000% 0.000% 0 0 0.000% 0.000%

Source: EPA estimates based on methodologies presented in this chapter and in Chapter Four.

6 29 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 6 7d. Estimated Number of Small Business Owned Establishments With Compliance Costs Exceeding 3 Percent of Revenues Estimated Cost Pass Through Option Single family Multifamily Commercial Number Pct. of Small Businesses Number Pct. of Small Businesses Number Pct. of Small Businesses Low High Low High Low High Low High Low High Low High 1 0 2 0.000% 0.006% 0 0 0.000% 0.000% 0 2 0.000% 0.005%

2 0 7 0.000% 0.021% 0 0 0.000% 0.000% 0 8 0.000% 0.020%