This industry is in a state of change: rapid U. S. economic growth translated into vigorous sales of household and office funiture, but this trend is unlikely to continue as the U. S. economy cools after its record run. Adding to industry fluctuation is the merger of two large firms, Lay Z Boy and LADD Furniture. Although the industry includes a multitude of niche market players, it is really dominated by a few large companies that operate several subsidiaries, each with its own brand identity. It is unclear whether the merger between two key players in the market will compel other large manufacturers to pursue mergers and acquisitions.

What is clear, however, is that large U. S. manufacturers will seek to leverage their brand identities into wider profit margins by operating direct sales establishments and co branding. Manufacturers that are moving into retail and distribution include Bassett Furniture, Thomasville Furniture, Ethan Allen Interiors, and Drexel. Co branding efforts are aimed at capitalizing on the combined power of two identities, such as the Thomas Kinkade Collection from Lay Z Boy and popular artist Thomas Kinkade and the Ernest Hemingway Collection from Thomasville. The overarching goal is to enhance margins and ward off invigorated competition from foreign companies that have used this strategy to capture U. S. market share, such as the Swedish manufacturer Ikea ( Lemm, 2000).

U. S. imports of household furniture totaled nearly $ 7 billion in 1998. Between 1992 and 1998, furniture imports grew at an annualized rate of nearly 15 percent. Jamie Lemm, an analyst with the U. S. Department of Commerce's Office of Consumer Goods attributes this growth to changes in U. S. manufacturing and markets:

A portion of [ the] increase can be attributed to the labor intensive furniture parts imported by U. S. manufacturers to enhance product lines, but the increase also signifies the growing importance of the U. S. market to foreign firms. While some U. S. manufacturers operate showrooms, galleries, and retail outlets in foreign markets, few sell internationally on a large scale. In 1998, U. S. furniture exports totaled $ 1.6 billion, accounting for only 6 percent of all U. S. product shipments.

4.4 Paper and Allied Products ( SIC 26/ NAICS 322)

The paper and allied products industry is one of the largest manufacturing industries in the United States. In 1996, the industry shipped nearly $ 150 billion in paper commodities. The industry produces a wide range of wood pulp, primary paper products, and paperboard products such as printing and writing papers, industrial papers, tissues, container board, and boxboard. The industry also includes manufacturers that " convert" primary paper and paperboard into finished products like envelopes, packaging, and shipping containers ( EPA, 1995b). Paper and allied products industry subsectors that are likely to be affected by the proposed regulation are listed in Table 4 7. 4 9 Table 4 8 lists the paper and allied products industry's value of shipments from 1987 to 1996. The industry's performance is tied to raw material prices, labor conditions, and worldwide inventories and demand ( EPA, 1995b). Performance over the 10 year period was typical of most manufacturing industries. The industry expanded in the late 1980s, then contracted as demand tapered off as the industry suffered recessionary effects. In the two years after 1994, the industry's value of shipments increased 9.3 percent to $ 149.5 billion.

4.4.1 Supply Side of the Industry <IP_ADDRESS> Production Process The manufacturing paper and allied products industry is capital and resource intensive, consuming large amounts of pulp wood and water in the manufacturing process. Approximately half of all paper and allied products establishments are integrated facilities, meaning that they produce both pulp and paper onsite The remaining half produce only paper products; few facilities produce only pulp ( EPA, 1995b). Table 4 7. Paper and Allied Products Industry Markets Likely to Be Affected by Regulation SIC NAICS Industry Description 2611 32211 Pulp Mills 2621 32212 Paper Mills 2676 322291 Sanitary Paper Products Source: Industrial Combustion Coordinated Rulemaking ( ICCR). 1998. Data/ Information Submitted to the Coordinating Committee at the Final Meeting of the Industrial Combustion Coordinated Rulemaking Federal Advisory Committee. EPA Docket Numbers A 94 63, II K 4b2 through  4b5. Research Triangle Park, North Carolina. September 16 17. 4 10 The paper and paperboard manufacturing process can be divided into three general steps: pulp making, pulp processing, and paper/ paperboard production. Paper and paperboard are manufactured using what is essentially the same process. The principal difference between the two products is that paperboard is thicker than paper's 0.3 mm.

Producers manufacture pulp mixtures by using chemicals, machines, or both to reduce raw material into small fibers. In the case of wood, the most common pulping material, chemical pulping actions release cellulose fibers by selectively destroying the chemical bonds that bind the fibers together ( EPA, 1995b). Impurities are removed from the pulp, which then may be bleached to improve brightness. Only about 20 percent of pulp and paper mills practice bleaching ( EPA, 1995b). The pulp may also be further processed to aid in the paper making process.

During the paper making stage, the pulp is strengthened and then converted into paper. Pulp can be combined with dyes, resins, filler materials, or other additives to better fulfill specifications for the final product. Next, the water is removed from the pulp, leaving the pulp on a wire or wire mesh conveyor. The fibers bond together as they are carried through heated presses and rollers. The paper is stored on large rolls before being shipped for conversion into another product, such as envelopes and boxes, or cut into paper sheets for immediate consumption.

<IP_ADDRESS> Types of Output The paper and allied products industry's output ranges from writing papers to containers and packaging. Paper products include printing and writing papers; paperboard boxes; corrugated and solid fiber boxes; fiber cans, drums, and similar products; sanitary food containers; building paper; packaging; bags; sanitary paper napkins; envelopes; stationary products; and other converted paper products. Table 4 8. Value of Shipments for the Paper and Allied Products Industry ( SIC 26/ NAICS 322), 1987   1996 Year Value of Shipments ( 1992 $ 106)

1987 129,927.8 1988 136,829.4 1989 138,978.3 1990 136,175.7 1991 132,225.0 1992 133,200.7 1993 131,362.2 1994 136,879.9 1995 135,470.3 1996 149,517.1 Sources: U. S. Department of Commerce, Bureau of the Census. 1996. 1992 Census of Manufactures, Subject Series: General Summary. Washington, DC: Government Printing Office.

U. S. Department of Commerce, Bureau of the Census. 1990   1998. Annual Survey of Manufactures, [ Multiple Years]. Washington, DC: Government Printing Office. 4 11 <IP_ADDRESS> Major By Products and Co Products The paper and allied products industry is the largest user of industrial process water in the United States. In 1988, a typical mill used between 16,000 and 17,000 gallons of water per ton of paper produced. The equivalent amount of waste water discharged each day is about 16 million cubic meters ( EPA, 1995b). Most facilities operate waste water treatment facilities on site to remove biological oxygen demand ( BOD), total suspended solids ( TSS), and other pollutants before discharging the water into a nearby waterway.

<IP_ADDRESS> Costs of Production Historical statistics for the costs of production for the paper and allied products industry are listed in Table 4 9. From 1987 to 1996, industry payroll generally ranged from approximately $ 19 to 20 billion. Employment peaked at 633,200 people in 1989 and declined slightly to 630,600 people by 1996. Materials costs averaged $ 74.4 billion a year and new capital investment averaged $ 8.3 billion a year.

<IP_ADDRESS> Capacity Utilization Table 4 10 presents the trend in capacity utilization for the paper and allied products industry. The varying capacities reflect adjusting production levels and new production facilities going on or off line. The average capacity utilization ratio for the paper and allied products industry between 1991 and 1996 was approximately 80, with capacity declining slightly in recent years. Table 4 9. Inputs for the Paper and Allied Products Industry ( SIC 26/ NAICS 322), 1987   1996 Labor Year Quantity ( 103) Payroll ( 1992 $ 106) Materials ( 1992 $ 106) New Capital Investment ( 1992 $ 106)

1987 611.1 20,098.6 70,040.6 6,857.5 1988 619.8 19,659.0 73,447.4 8,083.8 1989 633.2 19,493.1 75,132.5 10,092.9 1990 631.2 19,605.2 74,568.8 11,267.2 1991 624.7 19,856.3 72,602.5 9,353.9 1992 626.3 20,491.9 73,188.0 7,962.4 1993 626.3 20,602.6 73,062.6 7,265.2 1994 621.4 20,429.7 76,461.6 6,961.7 1995 629.2 18,784.3 79,968.6 7,056.8 1996 630.6 19,750.0 75,805.9 8,005.9 Sources: U. S. Department of Commerce, Bureau of the Census. 1996. 1992 Census of Manufactures, Subject Series: General Summery. Washington, DC: Government Printing Office.

U. S. Department of Commerce, Bureau of the Census. 1990   1998. Annual Survey of Manufactures [ Multiple Years]. Washington, DC: Government Printing Office. 4 12 4.4.2 Demand Side of the Industry <IP_ADDRESS> Product Characteristics Paper is valued for its diversity in product types, applications, and low cost due to ready access to raw materials. Manufacturers produce papers of varying durabilities, textures, and colors. Consumers purchasing large quantities of papers may have papers tailored to their specification. Papers may be simple writing papers or newsprint for personal consumption and for the printing and publishing industry or durable for conversion into shipping cartons, drums, or sanitary boxes. Inputs in the paper production process are readily available in the United States because one third of the country is forested, and facilities generally have ready access to waterways.

<IP_ADDRESS> Uses and Consumers of Products The paper and allied products industry is an integral part of the U. S. economy; nearly every industry and service sector relies on paper products for its personal, education, and business needs. Among a myriad of uses, papers are used for correspondence, printing and publishing, packing and storage, and sanitary purposes. Common applications are all manners of reading material, correspondence, sanitary containers, shipping cartons and drums, and miscellaneous packing materials.

4.4.3 Organization of the Industry In 1992, 4,264 companies produced paper and allied products and operated 6,416 facilities. By way of comparison, 4,215 companies controlled 1,732 facilities in 1987. Although the number of small firms and facilities increased during those 5 years, the industry is dominated by high volume, low cost producers ( Haltmaier, 1998). Even though they account for only 45 percent of all facilities, those with 50 or more employees contribute more than 93 percent of the industry's total value of shipments ( see Table 4 11). ( According to the Small Business Administration, those companies employing fewer than 500 employees are " small.")

For paper and allied products markets likely to be affected by the proposed boilers regulation, the CR4 ranged between 29 and 68 in 1992 ( see Table 4 12). This means that, in each subsector, the top firms' combined sales ranged from 29 to 68 percent of their respective industry's total sales. For example, in the Table 4 10. Capacity Utilization Ratios for the Paper and Allied Products Industry, 1991   1996 1991 1992 1993 1994 1995 1996 78 80 81 80 77 78 Note: All values are percentages.

Source: U. S. Department of Commerce, Bureau of the Census. 1998. Survey of Plant Capacity: 1996. Washington, DC: Government Printing Office. 4 13 sanitary paper products industry, the CR4 ratios indicate that a few firms control 68 percent of the Table 4 11. Size of Establishments and Value of Shipments for the Paper and Allied Products Industry ( SIC 26/ NAICS 322)

1987 1992 Number of Employees in Establishment Number of Facilities Value of Shipments ($ 106) Number of Facilities Value of Shipments ($ 106)

1 to 4 employees 729 640.6 786 216 4 to 9 employees 531 ( D) 565 483 10 to 19 employees 888 1,563.4 816 1,456.5 20 to 49 employees 1,433 18,328.6 1,389 6,366.6 50 to 99 employees 1,018 ( D) 1,088 12,811.5 100 to 249 employees 1,176 32,141.7 1,253 35,114.0 250 to 499 employees 308 24,221.1 298 22,281.2 500 to 999 employees 145 28,129.1 159 31,356.5 1,000 to 2,499 employees 63 24,903.1 62 23,115.4 2,500 or more employees 1 ( D)

Total 1,732 129,927.8 6,416 133,200.7 ( D) = undisclosed Sources: U. S. Department of Commerce, Bureau of the Census. 1990c. 1987 Census of Manufactures, Industry Series: Pulp, Paper, and Board Mills. Washington, DC: Government Printing Office.

U. S. Department of Commerce, Bureau of the Census. 1995c. 1992 Census of Manufactures, Industry Series: Pulp, Paper, and Board Mills. Washington, DC: Government Printing Office. 4 14 market. This sector's moderately concentrated nature is Table 4 12. Measurements of Market Concentration for Paper and Allied Products Markets SIC Description CR4 CR8 HHI Number of Companies Number of Facilities 2611 Pulp Mills 48 75 858 29 45 2621 Paper Mills 29 49 392 127 280 2676 Sanitary Paper Products 68 82 1,451 80 150 Sources: U. S. Department of Commerce, Bureau of the Census. 1995d. 1992 Concentration Ratios in Manufacturing. Washington, DC: Government Printing Office.

U. S. Department of Commerce, Bureau of the Census. 1995c. 1992 Census of Manufactures, Industry Series: Pulp, Paper, and Board Mills. Washington, DC: Government Printing Office. 4 15 also indicated by its HHI of 1,451 ( DOJ, 1992). The remaining two sectors' HHIs indicate that their respective markets are unconcentrated ( i. e., competitive).

4.4.4 Markets and Trends The Department of Commerce projects that shipments of paper and allied products will increase through 2002 by an annual average of 2.5 percent ( Haltmaier, 1998). Because nearly all of the industry's products are consumer related, shipments will be most affected by the health of the U. S. and global economy. The United States is a key competitor in the international market for paper products and, after Canada, is the largest exporter of paper products. According to Haltmaier ( 1998), the largest paper and allied products exporters in the world are Canada ( with 23 percent of the market), the United States ( 10 to 15 percent), Finland ( 8 percent), and Sweden ( 7 percent).

4.5 Medicinal Chemicals and Botanical Products and Pharmaceutical Preparations ( SICs 2833, 2834/ NAICS 32451)

The pharmaceutical preparations industry ( SIC 2834/ NAICS 32451) and the medicinal chemicals and botanical products industry ( SIC 2833/ NAICS 32451) are both primarily engaged in the research, development, manufacture, and/ or processing of medicinal chemicals and pharmaceutical products. Apart from manufacturing drugs for human and veterinary consumption, the industries grind, grade, and mill botanical products that are inputs for other industries. Typically, most facilities cross over into both industries ( EPA, 1997a). Products include drugs, vitamins, herbal remedies, and production inputs, such as alkaloids and other active medicinal principals.

Table 4 13 presents both industries' value of shipments from 1987 to 1996. Medicinals and botanicals' performance during the late 1980s and early 1990s was mixed. However, shipments increased steadily from 1994 to 1996, increasing 37.7 percent as natural products such as herbs and vitamins became more popular ( EPA, 1997a). Pharmaceutical preparations' shipments increased steadily over the 10 year period. From 1987 to 1996, the industry's shipments increased 24.3 percent to $ 55.1 billion in 1996. Table 4 13. Value of Shipments for the Medicinals and Botanicals and Pharmaceutical Preparations Industries, 1987   1996 Year SIC 2833 Medicinals & Botanicals ($ 106) SIC 2834 Pharmaceutical Preparations ($ 106)

1987 4,629.1 44,345.7 1988 5,375.4 46,399.1 1989 5,708.9 48,083.6 1990 5,535.8 49,718.0 1991 6,637.7 49,866.3 1992 6,438.5 50,417.9 1993 5,669.2 50,973.5 1994 5,774.7 53,144.7 1995 6,404.1 53,225.9 1996 7,952.8 55,103.6 Sources: U. S. Department of Commerce, Bureau of the Census. 1995a. 1992 Census of Manufactures, Industry Series: Drug Industry. Washington, DC: Government Printing Office.

U. S. Department of Commerce, Bureau of the Census. 1990   1998. Annual Survey of Manufactures [ Multiple Years]. Washington, DC: Government Printing Office. 4 16 4.5.1 Supply Side of the Industry <IP_ADDRESS> Production Processes The medicinals and botanical products industry and the pharmaceutical preparations industry share similar production processes. Many products of the former are inputs in the latter's production process. There are three manufacturing stages: research and development, preparation of bulk ingredients, and formulation of the final product.

The research and development stage is a long process both to ensure the validity and benefit of the end product and to satisfy the requirements of stringent federal regulatory committees. ( The pharmaceutical industry operates under strict oversight of the Food and Drug Administration [ FDA].) Therefore, every stage in the development of new drugs is thoroughly documented and studied. After a new compound is discovered, it is subjected to numerous laboratory and animal tests. Results are presented to the FDA via applications that present and fully disclose all findings to date. As research and development proceeds, studies are gradually expanded to involve human trials of the new compound. Should FDA approve the compound, the new product is readied for mass production.

To ensure a uniform product, all ingredients are prepared in bulk using batch processes. Companies produce enough of each ingredient to satisfy projected sales demand ( EPA, 1997a). Prior to production, all equipment is thoroughly cleaned, prepared, and validated to prevent any contaminants from entering the production cycle. Most ingredients are prepared by chemical synthesis, a method whereby primary ingredients undergo a complex series of processes, including many intermediate stages and chemical reactions in a step by step fashion ( EPA, 1997a).

After the bulk materials are prepared, they are converted into a final usable form. Common forms include tablets, pills, liquids, creams, and ointments. Equipment used in this final stage is prepared in the same manner as that involved in the bulk preparation process. Clean and validated machinery is used to process and package the pharmaceuticals for shipment and consumption.

<IP_ADDRESS> Types of Output Both industries produce pharmaceutical and botanical products for end consumption and intermediate products for the industries' own applications. Products include vitamins, herbal remedies, and alkaloids. Prescription and over the counter drugs are produced in liquid, tablet, cream, and other forms.

<IP_ADDRESS> Major By Products and Co Products Both industries produce many by products because of the large number of primary inputs and the extensive chemical processes involved. Wastes and emissions vary by the process employed, raw materials consumed, and equipment used. In general, emissions originate during drying and heating stages and during process water discharge. Emissions controls are in place pursuant to environmental regulations. Other wastes include used filters, spent raw materials, rejected product, and reaction residues ( EPA, 1997a).

<IP_ADDRESS> Costs of Production Table 4 14 presents SIC 2833 industry's costs of production and employment statistics from 1987 to 1996. Employment was stable during the late 1980s before steadily growing in the 1990s. In 1987, medicinals and botanicals employed 11,600 people. By 1996, the industry employed 16,800, an increase of 4 17 nearly 45 percent. Materials costs matched the increase in shipments over this same period. Industry growth also fed new capital investments, which averaged $ 191.2 million a year in the late 1980s and $ 515.6 million a year in the early to mid 1990s.

SIC 2834' s costs of production and employment for 1987 to 1996 are presented in Table 4 15. The number of people employed by the industry ranged between 123,000 and 144,000; employment peaked in 1990 before declining by 21,000 jobs by the end of 1992. During this 10 year period, the cost of materials rose 42.1 percent. The increase is associated with increased product shipments and the development of new, more expensive medications ( Haltmaier, 1998). New capital investment averaged $ 2.3 billion a year.

<IP_ADDRESS> Capacity Utilization Table 4 16 presents the trend in these ratios from 1991 to 1996 for both industries. The varying capacity ratios reflect adjusting production volumes and new production facilities and capacity going both on and off line. In 1996, the capacity utilization ratios for SICs 2833 and 2834 were 84 and 67, respectively. Table 4 14. Inputs for Medicinal Chemicals and Botanical Products Industry ( SIC 2833/ NAICS 32451), 1987   1996 Labor Year Quantity ( 103) Payroll ($ 106) Materials ($ 106) New Capital Investment ($ 106)

1987 11.6 520.2 2,229.3 158.2 1988 11.3 494.4 2,658.8 194.9 1989 11.4 504.9 3,118.4 263.4 1990 10.9 476.4 2,902.4 218.9 1991 12.5 568.6 3,368.2 512.9 1992 13.0 587.1 3,245.9 550.5 1993 13.0 584.3 2,638.4 470.0 1994 13.9 572.6 2,755.2 480.3 1995 14.1 625.0 3,006.0 356.2 1996 16.8 752.1 3,793.9 752.1 Sources: U. S. Department of Commerce, Bureau of the Census. 1995a. 1992 Census of Manufactures, Industry Series: Drug Industry. Washington, DC: Government Printing Office.

U. S. Department of Commerce, Bureau of the Census. 1990   1998. Annual Survey of Manufactures, [ Multiple Years]. Washington, DC: Government Printing Office. 4 18 Table 4 15. Inputs for the Pharmaceutical Preparations Industry ( SIC 2834/ NAICS 32451), 1987 1996 Labor New Capital Investment ($ 106) Year Quantity ( 103) Payroll ($ 106) Materials ($ 106)

1987 131.6 5,759.2 11,693.7 2,032.7 1988 133.4 5,447.2 12,634.8 2,234.0 1989 141.8 6,177.5 12,874.2 2,321.4 1990 143.8 6,223.9 13,237.6 2,035.3 1991 129.1 5,275.8 13,546.6 1,864.7 1992 122.8 4,949.4 13,542.5 2,450.0 1993 128.2 5,184.2 13,508.7 2,385.2 1994 134.2 5,368.4 13,526.1 2,531.9 1995 143.0 5,712.4 15,333.6 2,856.1 1996 136.9 5,547.3 16,611.1 2,317.0 Sources: U. S. Department of Commerce, Bureau of the Census. 1995a. 1992 Census of Manufactures, Industry Series: Drug Industry. Washington, DC: Government Printing Office.

U. S. Department of Commerce, Bureau of the Census. 1990   1998. Annual Survey of Manufactures, [ Multiple Years]. Washington, DC: Government Printing Office. 4 19 4.5.2 Demand Side of the Industry New product introductions and improvements on older medications by the drug industry have greatly improved the health and well being of the U. S. population ( Haltmaier, 1998). Products help alleviate or reduce physical, mental, and emotional ailments or reduce the severity of symptoms associated with disease, age, and degenerative conditions. Dietary supplements, such as vitamins and herbal remedies, ensure that consumers receive nutrients of which they may not ordinarily consume enough. Products are available in a range of dosage types, such as tablets and liquids. Table 4 16. Capacity Utilization Ratios for the Medicinal Chemicals and Botanical Products ( SIC 2833/ NAICS 32451) and Pharmaceutical Preparations ( SIC 2834/ NAICS 32451) Industries, 1991 1996 1991 1992 1993 1994 1995 1996 SIC 2833/ NAICS 32451 84 86 89 80 90 84 SIC 2834/ NAICS 32451 76 74 70 67 63 67 Note: Capacity utilization ratio is the ratio of the actual production level to the full production level. All values are percentages.

Source: U. S. Department of Commerce, Bureau of the Census. 1998. Survey of Plant Capacity: 1996. Washington, DC: Government Printing Office. 4 20 Although prescription medications are increasingly distributed through third parties, such as hospitals and health maintenance organizations, the general population remains the end user of pharmaceutical products. As the average age of the U. S. population adjusts to reflect large numbers of older people, the variety and number of drugs consumed increases. An older population will generally consume more medications to maintain and improve quality of life ( Haltmaier, 1998).

4.5.3 Organization of the Industry In 1992, 208 companies produced medicinal chemicals and botanical products and operated 225 facilities ( see Table 4 17). The number of companies and facilities in 1992 was the same as that of 1987, although shipment values increased almost 40 percent. The average facility employed more people in 1992 than in 1987. In fact, the number of facilities employing 50 or more people grew from 37 to 45. These facilities accounted for the lion's share of the industry's shipments. According to the Small Business Administration, companies in this SIC code are considered small if they employ fewer than 750 employees. It is unclear what percentage of the facilities listed in Table 4 17 are small companies.

In 1992, 585 companies manufactured pharmaceutical preparations and operated 691 facilities. By way of comparison, 640 companies operated 732 facilities in 1987. Although the number of facilities declined by 41, no particular category lost or gained an exceptional number of facilities. The biggest movement was in the five to nine employees category, which lost 35 facilities. 4 21 Table 4 17. Size of Establishments and Value of Shipments for the Medicinal Chemicals and Botanical Products ( SIC 2833/ NAICS 32451) and Pharmaceutical Preparations ( SIC 2834/ NAICS 32451) Industries 1987 1992 Number of Employees in Establishment Number of Facilities Value of Shipments ($ 106) Number of Facilities Value of Shipments ($ 106) SIC 2833/ NAICS 32451 1 to 4 employees 61 20.7 62 23.8 5 to 9 employees 34 38.6 42 58.3 10 to 19 employees 46 237.0 47 357.1 20 to 49 employees 47 287.3 29 182.0 50 to 99 employees 15 273.6 25 653.9 100 to 249 employees 12 520.6 10 5,163.4 250 to 499 employees 5 753.0 4 ( D) 500 to 999 employees 4 2478.2 3 ( D) 1,000 to 2,499 employees 1 ( D) 3 ( D) Total 225 4629.1 225 6,438.5 SIC 2834/ NAICS 32451 1 to 4 employees 158 58.7 152 115.6 5 to 9 employees 108 178.8 73 105.4 10 to 19 employees 102 320.3 101 284.6 20 to 49 employees 117 932.5 110 815.7 50 to 99 employees 66 1231.0 65 1,966.8 100 to 249 employees 76 3596.0 77 2,912.4 250 to 499 employees 50 9239.7 56 11,394.6 500 to 999 employees 23 4946.9 30 10,077.7 1,000 to 2,499 employees 24 15,100.9 21 14,525.7 2,500 employees or more 8 8740.9 6 8,219.4 Total 732 44,345.7 691 50,417.9 ( D) = undisclosed Sources: U. S. Department of Commerce, Bureau of the Census. 1990a. 1987 Census of Manufactures, Industry Series: Drug Industry. Washington, DC: Government Printing Office.

U. S. Department of Commerce, Bureau of the Census. 1995a. 1992 Census of Manufactures, Industry Series: Drug Industry. Washington, DC: Government Printing 4 22 In both years, facilities 4 23 with more than 50 employees accounted for at least 95 percent of the industry's shipments.

Table 4 18 presents the measures of market concentration for both industries. For the medicinals and botanicals industry, the CR4 was 76 in 1992, and the CR8 was 84 ( U. S. Department of Commerce, 1995b). The highly concentrated nature of the market is further indicated by an HHI of 2,999 ( DOJ, 1992). According to the Department of Justice's Horizontal Merger Guidelines, industries with HHIs above 1,800 are less competitive.

The pharmaceuticals preparations industry is less concentrated than the medicinal chemicals and botanical products industry. For SIC 2834, the CR4 and CR8 were 26 and 42, respectively, in 1992. The industry's HHI was 341, indicating a competitive market.

4.5.4 Markets and Trends According to the Department of Commerce, global growth in the consumption of pharmaceuticals is projected to accelerate over the coming decade as populations in developed countries age and those in developing nations gain wider access to health care. Currently, the United States remains the largest market for drugs, medicinals, and botanicals and produces more new products than any other country ( Haltmaier, 1998). But, nearly two fifths of American producers' sales are generated abroad. Top markets for American exports are China, Canada, Mexico, Australia, and Japan. Most imports originate in Canada, Russia, Mexico, Trinidad and Tobago, and Norway.

4.6 Industrial Organic Chemicals Industry ( SIC 2869/ NAICS 3251)

The industrial organic chemicals ( not elsewhere classified) industry ( SIC 2869/ NAICS 3251) produces organic chemicals for end use applications and for inputs into numerous other chemical manufacturing industries. In nominal terms, it was the single largest segment of the $ 367 billion chemical and allied products industry ( SIC 28) in 1996, accounting for approximately 17 percent of the industry's shipments.

All organic chemicals are, by definition, carbon based and are divided into two general categories: commodity and specialty. Commodity chemical manufacturers compete on price and produce large volumes of staple chemicals using continuous manufacturing processes. Specialty chemicals cater to custom Table 4 18. Measures of Market Concentration for the Medicinal Chemicals and Botanical Products ( SIC 2833/ NAICS 32451) and Pharmaceutical Preparations ( SIC 2834/ NAICS 32451) Industries SIC NAICS Industry CR4 CR8 HHI Number of Companie s Number of Facilities 2833 32451 Medicinal Chemicals and Botanical Products 76 84 2,999 208 225 2834 32451 Pharmaceutical Preparations 26 42 341 585 691 Sources: U. S. Department of Commerce, Bureau of the Census. 1995b. 1992 Concentration Ratios in Manufacturing. Washington, DC: Government Printing Office.

U. S. Department of Commerce, Bureau of the Census. 1995a. 1992 Census of Manufactures, Industry Series: Drug Industry. Washington, DC: Government Printing Office. 4 24 markets, using batch processes to produce a diverse range of chemicals. Specialty chemicals generally require more technical expertise and research and development than the more standardized commodity chemicals industry ( EPA, 1995c). Consequently, specialty chemical manufacturers have a greater value added to their products. End products for all industrial organic chemical producers are as varied as synthetic perfumes, flavoring chemicals, glycerin, and plasticizers.

Table 4 19 presents the shipments of industrial organic chemicals from 1987 to 1996. In real terms, the industry's shipments rose in the late 1980s to a high of $ 54.9 billion before declining in the early 1990s as the U. S. economy went into recession. By the mid 1990s, the industry recovered, as product values reached record highs ( Haltmaier, 1998). Between 1993 and 1996, the industry's shipments grew 7.3 percent to $ 57.7 billion.

4.6.1 Supply Side of the Industry <IP_ADDRESS> Production Processes Processes used to manufacture industrial organic chemicals are as varied as the end products themselves. There are thousands of possible ingredients and hundreds of processes. Therefore, the discussion that follows is a general description of the ingredients and stages involved in a typical manufacturing process.

Essentially a set of ingredients ( feedstocks) is combined in a series of reactions to produce end products and intermediates ( EPA, 1995c). The typical chemical synthesis processes incorporate multiple feedstocks in a series of chemical reactions. Commodity chemicals are produced in a continuous reactor, and specialty chemicals are produced in batches. Specialty chemicals may undergo a series of reaction steps, as opposed to commodity chemicals' one continuous reaction because a finite amount of ingredients are prepared and used in the production process. Reactions usually take place at high temperatures, with one or two additional components being intermittently added. As the production advances, by products are Table 4 19. Value of Shipments for the Industrial Organic Chemicals, N. E. C. Industry ( SIC 2869/ NAICS 3251), 1987 1996 Year Value of Shipments ( 1992 $ 106)

1987 48,581.7 1988 53,434.7 1989 54,962.9 1990 53,238.8 1991 51,795.6 1992 54,254.2 1993 53,805.2 1994 57,357.1 1995 59,484.3 1996 57,743.3 Sources: U. S. Department of Commerce, Bureau of the Census. 1995b. 1992 Census of Manufactures, Industry Series: Industrial Organic Chemicals. Washington, DC: Government Printing Office.

U. S. Department of Commerce, Bureau of the Census. 1990   1998. Annual Survey of Manufactures, Multiple Years. Washington, DC: Government Printing Office. 4 25 removed using separation, distillation, or refrigeration techniques. The final product may undergo a drying or pelletizing stage to form a more manageable substance.

<IP_ADDRESS> Types of Output Miscellaneous industrial organic chemicals comprise nine general categories of products:

aliphitic and other acyclic organic chemicals ( ethylene); acetic, chloroaceptic, adipic, formic, oxalic, and tartaric acids and their metallic salts; chloral, formaldehyde, and methylamine;

solvents ( ethyl alcohol etc.); methanol; amyl, butyl, and ethyl acetates; ethers; acetone, carbon disulfide and chlorinated solvents;

polyhydric alcohols ( synthetic glycerin, etc.);

synthetic perfume and flavoring materials ( citral, methyl, oinone, etc.);

rubber processing chemicals, both accelerators and antioxidants ( cyclic and acyclic);

cyclic and acyclic plasticizers ( phosphoric acid, etc.);

synthetic tanning agents;

chemical warfare gases; and

esters, amines, etc., of polyhydric alcohols and fatty and other acids.

<IP_ADDRESS> Major By Products and Co Products Co products, by products, and emissions vary according to the ingredients, processes, maintenance practices, and equipment used ( EPA, 1997b). Frequently, residuals from the reaction process that are separated from the end product are resold or possibly reused in the manufacturing process. A by product from one process may be another's input. The industry is strictly regulated because it emits chemicals through many types of media, including discharges to air, land, and water, and because of the volume and composition of these emissions.

<IP_ADDRESS> Costs of Production Of all the factors of production, employment in industrial organic chemicals fluctuated most often between 1987 and 1996 ( see Table 4 20). During that time, employment fell 8.18 percent to 92,100, after a high of 101,000 in 1991. Most jobs lost were at the production level ( Haltmaier, 1998). Facilities became far more computerized, incorporating advanced technologies into the production process. Even with the drop in employment, payroll was $ 200 million more in 1995 than in 1987. The cost of materials fluctuated between $ 29 and $ 36 billion for these years, and new capital investment averaged $ 3,646 million a year. 4 26 <IP_ADDRESS> Capacity Utilization Table 4 21 presents the trend in capacity utilization ratios from 1991 to 1996 for the industrial organic chemicals industry. The varying capacity utilization ratios reflect changes in production volumes and new production facilities and capacities going on and off line. The capacity utilization ratio for the industry averaged 85.3 over the 6 year period presented.

4.6.2 Demand Side of the Industry Industrial organic chemicals are components of many chemical products. Most of the chemical sectors ( classified under SIC 28) are downstream users of organic chemicals. These sectors either purchase commodity chemicals or enter into contracts with industrial organic chemical producers to obtain specialty chemicals. Consumers include inorganic chemicals ( SIC 281), plastics and synthetics ( SIC 282), drugs ( 283), soaps and cleaners ( SIC 284), paints and allied products ( SIC 286), and miscellaneous chemical products ( SIC 289). Table 4 20. Inputs for the Industrial Organic Chemicals Industry ( SIC 2869/ NAICS 3251), 1987   1996 Year Labor Materials ( 1992 $ 106) New Capital Investment ( 1992 $ 106) Quantity ( 103) Payroll ( 1992 $ 106)

1987 100.3 4,295.8 28,147.7 2,307.4 1988 97.1 4,045.1 29,492.8 2,996.5 1989 97.9 3,977.4 29,676.4 3,513.0 1990 100.3 4,144.6 29,579.2 4,085.5 1991 101.0 4,297.3 29,335.2 4,428.7 1992 100.1 4,504.2 31,860.6 4,216.6 1993 97.8 4,540.2 30,920.1 3,386.1 1994 89.8 4,476.5 33,267.4 2,942.8 1995 92.1 4,510.4 33,163.9 3,791.0 1996 100.3 5,144.8 36,068.9 4,794.7 Sources: U. S. Department of Commerce, Bureau of the Census. 1995b. 1992 Census of Manufactures. Washington, DC: Government Printing Office.

U. S. Department of Commerce, Bureau of the Census. 1990   1998. Annual Survey of Manufactures. Washington, DC: Government Printing Office. 4 27 4.6.3 Organization of the Industry Although the industry's value of shipments increased nearly 12 percent between 1987 and 1992, the number of facilities producing industrial organic chemicals only increased by 6 percent. Facilities with 100 or more employees continued to account for the majority of the industry's shipment values. For example, in 1992, 28 percent of all facilities had 100 or more employees ( see Table 4 22), and these facilities produced 89 percent of the industry's shipment values. The average number of facilities per firm was 1.4 in both years. According to the Small Business Administration, an industrial organic chemicals company is considered small if the total number of employees does not exceed 500. It is unclear what percentage of facilities are owned by small businesses.

The industrial organic chemicals ( not elsewhere classified) industry is unconcentrated and competitive. The CR4 was 29 and the CR8 43; the industry's HHI was 336.

4.6.4 Markets and Trends The U. S. industrial organic chemical industry is expected to expand through 2002 at an annual rate of 1.4 percent ( Haltmaier, 1998). U. S. producers face increasing competition domestically and abroad as chemical industries in developing nations gain market share and increase exports to the United States. American producers will, however, benefit from decreasing costs for raw materials and energy and productivity gains. Table 4 21. Capacity Utilization Ratios for the Industrial Organic Chemicals Industry ( SIC 2869/ NAICS 3251), 1991   1996 1991 1992 1993 1994 1995 1996 SIC 2869/ NAICS 3251 86 81 91 89 84 84 Note: The capacity utilization ratio is the ratio of the actual production level to the full production level.

All values are percentages.

Source: U. S. Department of Commerce, Bureau of the Census. 1998. Survey of Plant Capacity: 1996. Washington, DC: Government Printing Office. 4 28 4.7 Electric Services ( SIC 4911/ NAICS 22111)

The ongoing process of deregulation of wholesale and retail electric markets is changing the structure of the electric power industry. Deregulation is leading to the functional unbundling of generation, transmission, and distribution and to competition in the generation segment of the industry. This profile provides background information on the U. S. electric power industry and discusses current industry characteristics and trends that will influence the future generation and consumption of electricity. It is important to note that through out this report the terms " boilers," " process heaters," and " units" are synonymous with " ICI boilers" and " process heaters." Boilers primarily engaged in the generation of electricity are not covered by the NESHAP under analysis and are therefore excluded from this analysis. Utility sources are not affected by this NESHAP except for a small number of nonfossil fuel units within this industry. Those units in this industry that are affected may be engaged in activities such as heating and mechanized work.

4.7.1 Electricity Production Figure 4 1 illustrates the typical structure of the electric utility market. Even with the technological and regulatory changes in the 1970s and 1980s, at the beginning of the 1990s the structure of the electric utility industry could still be characterized in terms of generation, transmission, and distribution. Table 4 22. Size of Establishments and Value of Shipments for the Industrial Organic Chemicals Industry ( SIC 2869/ NAICS 3251)

1987 1992 Number of Employees in Establishment Number of Facilities Value of Shipments ( 1992 $ 106) Number of Facilities Value of Shipments ( 1992 $ 106)

1 to 4 employees 97 552.8 100 102.6 5 to 9 employees 80 200.9 80 208.7 10 to 19 employees 91 484.7 97 533.9 20 to 49 employees 137 1,749.9 125 1,701.5 50 to 99 employees 99 2556.3 106 3,460.9 100 to 249 employees 110 10,361.2 111 8,855.9 250 to 499 employees 41 17,156.9 41 9,971.1 500 to 999 employees 27 9,615.5 30 13,755.0 1,000 to 2,499 employees 11 9,184.6 10 9,051.0 2,500 or more employees 6 7,156.9 5 6,613.5 Sources: U. S. Department of Commerce, Bureau of the Census. 1995b. 1992 Census of Manufactures, Industry Series: Industrial Organic Chemicals. Washington, DC: Government Printing Office.

U. S. Department of Commerce, Bureau of the Census. 1990b. 1987 Census of Manufactures, Industry Series, Paints and Allied Products. Washington, DC: Government Printing Office. 4 29 Commercial and retail customers were in essence " captive," and rates and service quality were primarily determined by public utility commissions.

The majority of utilities are interconnected and belong to a regional power pool. Pooling arrangements enable facilities to coordinate the economic dispatch of generation facilities and manage transmission congestion. In addition, pooling diverse loads can increase load factors and decrease costs by sharing reserve capacity.

<IP_ADDRESS> Generation As shown in Table 4 23, coal fired plants have historically accounted for the bulk of electricity generation in the United States. With abundant national coal reserves and advances in pollution abatement technology, such as advanced scrubbers for pulverized coal and flue gas desulfurization systems, coal will likely remain the fuel of choice for most existing generating facilities over the near term.

Natural gas accounts for approximately 10 percent of current generation capacity but is expected to grow; advances in natural gas exploration and extraction technologies and new coal gasification have contributed to the use of natural gas for power generation.

Nuclear plants and renewable energy sources ( e. g., hydroelectric, solar, wind) provide approximately 20 percent and 10 percent of current generating capacity, respectively. However, there are no plans for new nuclear facilities to be constructed, and there is little additional growth forecasted in renewable energy.

Table 4 23. Net Generation by Energy Source, 1995 Energy Source Utility Generators ( MWh) Nonutility Generators ( MWh) Total ( MWh)

Fossil fuels 2,021,064 287,696 2,308,760 Coal 1,652,914 63,440 Natural gas 307,306 213,437 Petroleum 60,844 3,957 Nuclear 673,402   673,402 Hydroelectric 293,653 14,515 308,168 Renewable/ other 6,409 98,295 104,704 Total 2,994,582 400,505 3,395,033 Sources: U. S. Department of Energy, Energy Information Administration. 1996. Electric Power Annual, 1995. Vol. 1. DOE/ EIA 0348( 95/ 1). Washington, DC: U. S. Department of Energy.

U. S. Department of Energy, Energy Information Administration. 1999b. The Changing Structure of the Electric Power Industry 1999: Mergers and Other Corporate Combinations. Washington, DC: U. S. Department of Energy. 4 30 <IP_ADDRESS> Transmission Transmission refers to high voltage lines used to link generators to substations where power is stepped down for local distribution. Transmission systems have been traditionally characterized as a collection of independently operated networks or grids interconnected by bulk transmission interfaces.

Within a well defined service territory, the regulated utility has historically had responsibility for all aspects of developing, maintaining, and operating transmissions. These responsibilities included Large C/ I Customers Small C/ I Customers Residential Customers Transformer Generation Electricity Distribution High Voltage Lines Transmission Power Plants Figure 4 1. Traditional Electric Power Industry Structure 4 31

system planning and expanding,

maintaining power quality and stability, and

responding to failures.

Isolated systems were connected primarily to increase ( and lower the cost of) power reliability. Most utilities maintained sufficient generating capacity to meet customer needs, and bulk transactions were initially used only to support extreme demands or equipment outages.

<IP_ADDRESS> Distribution Low voltage distribution systems that deliver electricity to customers comprise integrated networks of smaller wires and substations that take the higher voltage and step it down to lower levels to match customers' needs.

The distribution system is the classic example of a natural monopoly because it is not practical to have more than one set of lines running through neighborhoods or from the curb to the house.

4.7.2 Cost of Production Table 4 24 shows total industry expenditures by production activities. Generation accounts for approximately 75.6 percent of the cost of delivered electric power in 1996. Transmission and distribution accounted for 2.5 percent and 5.6 percent, respectively. Customer accounts and sales and administrative costs accounted for the remaining 16.3 percent of the cost of delivered power.

4.7.3 Organization of the Industry Because the restructuring plans and time tables are made at the state level, the issues of asset ownership and control throughout the current supply chain in the electric power industry vary from state to state. However, the activities conducted throughout the supply chain are generally the same. This section focuses on the generation segment of the market because all the boilers affected by the regulation are involved in generation.

As part of deregulation, the transmission and distribution of electricity are being separated from the business of generating electricity, and a new competitive market in electricity generation is evolving. As power generators prepare for the competitive market, the share of electricity generation attributed to nonutilities and utilities is shifting.

More than 7,000 electricity suppliers currently operate in the U. S. market. As shown in Table 4 25, approximately 42 percent of suppliers are utilities and 58 percent are nonutilities. Utilities include investorowned cooperatives, and municipal systems. Of the approximately 3,100 4 32 Table 4 24. Total Expenditures in 1996 ($ 103)

Utility Ownership Generation Transmission Distributio n Customer Accounts and Sales Administration and General Expenses Investorowned 80,891,644 2,216,113 6,124,443 6,204,229 13,820,059 Publicly owned 12,495,324 840,931 1,017,646 486,195 1,360,111 Federal 3,685,719 327,443 1,435 55,536 443,809 Cooperatives 15,105,404 338,625 1,133,984 564,887 1,257,015 112,178,091 3,723,112 8,277,508 7,310,847 16,880,994 75.6% 2.5% 5.6% 4.9% 11.4% 148,370,552 Sources: U. S. Department of Energy, Energy Information Administration ( EIA). 1998b. Financial Statistics of Major Publicly Owned Electric Utilities, 1997. Washington, DC: U. S. Department of Energy.

U. S. Department of Energy, Energy Information Administration ( EIA). 1997. Financial Statistics of Major U. S. Investor Owned Electric Utilities, 1996. Washington, DC: U. S. Department of Energy. 4 33 utilities operating in the United States, only about 700 generate electric power. The majority of utilities distribute electricity that they have purchased from power generators via their own distribution systems.

Utility and nonutility generators produced a total of 3,369 billion kWh in 1995. Although utilities generate the vast majority of electricity produced in the United States, nonutility generators are quickly eroding utilities' shares of the market. Nonutility generators include private entities that generate power for their own use or to sell to utilities or other end users. Between 1985 and 1995, nonutility generation increased from 98 billion kWh ( 3.8 percent of total generation) to 374 billion kWh ( 11.1 percent). Figure 4 2 illustrates this shift in the share of utility and nonutility generation.

<IP_ADDRESS> Utilities There are four categories of utilities: investor owned utilities ( IOUs), publicly owned utilities, cooperative utilities, and federal utilities. Of the four, only IOUs always generate electricity.

IOUs are increasingly selling off generation assets to nonutilities or converting those assets into nonutilities ( Haltmaier, 1998). To prepare for the competitive market, IOUs have been lowering their operating costs, merging, and diversifying into nonutility businesses.

In 1995, utilities generated 89 percent of electricity, a decrease from 96 percent in 1985. IOUs generate the majority of the electricity produced in the United States. IOUs are either individual corporations or a holding company, in which a parent company operates one or more utilities integrated with one another. IOUs account for approximately three quarters of utility generation, a percentage that held constant between 1985 and 1995.

Many states, municipalities, and other government organizations also own and operate utilities, although the majority do not generate electricity. Those that do generate electricity operate capacity to supply some or all of their customers' needs. They tend to be small, localized outfits and can be found in 47 states. These publicly owned utilities accounted for about one tenth of utility generation in 1985 and 1995. In a deregulated market, these generators may be in direct competition with other utilities to service their market.

Table 4 25. Number of Electricity Suppliers in 1999 Electricity Suppliers Number Percent Utilities 3,124 42% Investor owned utilities 222 Cooperatives 875 Municipal systems 1,885 Public power districts 73 State projects 55 Federal agencies 14 Nonutilities 4,247 58% Nonutilities ( excluding EWGs) 4,103 Exempt wholesale generators 144 Total 7,371 100%

Source: U. S. Department of Energy, Energy Information Administration ( EIA). 1999b. The Changing Structure of the Electric Power Industry 1999: Mergers and Other Corporate Combinations. Washington, DC: U. S. Department of Energy. 4 34 a Includes facilities classified in more than one of the following FERC designated categories: cogenerator QF, small power producer QF, or exempt wholesale generator. Cogen = Cogenerator.

EWG = Exempt wholesale generator.

Other Non QF = Nocogenerator Non QF.

QF = Qualifying facility.

SPP = Small power producer.

Note: Sum of components may not equal total due to independent rounding. Classes for nonutility generation are determined by the class of each generating unit.

Sources: Utility data: U. S. Department of Energy, Energy Information Administration ( EIA). 1996. Electric Power Annual 1995. Volumes I and II. DOE/ EIA 0348( 95)/ 1. Washington, DC: U. S. Department of Energy; Table 8 ( and previous issues); 1985 nonutility data: Shares of generation estimated by EIA; total generation from Edison Electric Institute ( EEI). 1998. Statistical Yearbook of the Electric Utility Industry 1998. November. Washington, DC; 1995 nonutility data: U. S. Department of Energy, Energy Information Administration ( EIA). 1996. Electric Power Annual 1995. Volumes I and II. DOE/ EIA 0348( 95)/ 1. Washington, DC: U. S. Department of Energy.

Figure 4 2. Utility and Nonutility Generation and Shares by Class, 1988 and 1998 4 35 Rural electric cooperatives are formed and owned by groups of residents in rural areas to supply power to those areas. Cooperatives generally purchase from other utilities the energy that they sell to customers, but some generate their own power. Cooperatives only produced 5 percent of utility generation in 1985 and only 6 percent in 1995.

Utilities owned by the federal government accounted for about one tenth of generation in both 1985 and 1995. The federal government operated a small number of large utilities in 1995 that supplied power to large industrial consumers or federal installations. The Tennessee Valley Authority is an example of a federal utility.

<IP_ADDRESS> Nonutilities Nonutilities are private entities that generate power for their own use or to sell to utilities or other establishments. Nonutilities are usually operated at mines and manufacturing facilities, such as chemical plants and paper mills, or are operated by electric and gas service companies ( DOE, EIA, 1998a). More than 4,200 nonutilities operate in the United States.

4.7.4 Demand Side of the Industry <IP_ADDRESS> Electricity Consumption This section analyzes the growth projections for electricity consumption as well as the price elasticity of demand for electricity. Growth in electricity consumption has traditionally paralleled gross domestic product growth. However, improved energy efficiency of electrical equipment, such as highefficiency motors, has slowed demand growth over the past few decades. The magnitude of the relationship has been decreasing over time, from growth of 7 percent per year in the 1960s down to 1 percent in the 1980s. As a result, determining what the future growth will be is difficult, although it is expected to be positive ( DOE, EIA, 1999a). Table 4 26 shows consumption by sector of the economy over the past 10 years. The table shows that since 1989 electricity sales have increased at least 10 percent in all four sectors. The commercial sector has experienced the largest increase, followed by residential consumption.

In the future, residential demand is expected to be at the forefront of increased electricity consumption. Between 1997 and 2020, residential demand is expected to increase at 1.6 percent annually. Commercial growth in demand is expected to be approximately 1.4 percent, while 4 36 industry is expected to increase demand by 1.1 percent ( DOE, EIA, 1999a). Figure 4 3 shows the annual electricity sales by sector from 1970 with projections through 2020.

The literature suggests that electricity consumption is relatively price inelastic. Consumers are generally unable or unwilling to forego a large amount of consumption as the price increases. Numerous studies have investigated the short run elasticity of demand for electricity. Overall, the studies suggest that, for a 1 percent increase in the price of electricity, demand will decrease by 0.15 percent. However, as Table 4 27 shows, elasticities vary greatly, depending on the demand characteristics of end users and the price structure. Demand elasticities are estimated to range from a   0.05 percent elasticity of demand for a " flat rates" case ( i. e., no time of use assumption) up to a   0.50 percent demand elasticity for a " high consumer response" case ( DOE, EIA, 1999c). Table 4 26. U. S. Electric Utility Retail Sales of Electricity by Sector, 1989 Through 1998 ( 106 kWh)

Period Residential Commercial Industrial Othera All Sectors 1989 905,525 725,861 925,659 89,765 2,646,809 1990 924,019 751,027 945,522 91,988 2,712,555 1991 955,417 765,664 946,583 94,339 2,762,003 1992 935,939 761,271 972,714 93,442 2,763,365 1993 994,781 794,573 977,164 94,944 2,861,462 1994 1,008,482 820,269 1,007,981 97,830 2,934,563 1995 1,042,501 862,685 1,012,693 95,407 3,013,287 1996 1,082,491 887,425 1,030,356 97,539 3,097,810 1997 1,075,767 928,440 1,032,653 102,901 3,139,761 1998 1,124,004 948,904 1,047,346 99,868 3,220,121 Percentage change 1989 1998 19% 24% 12% 10% 18%

a Includes public street and highway lighting, other sales to public authorities, sales to railroads and railways, and interdepartmental sales.

Sources: U. S. Department of Energy, Energy Information Administration ( EIA). 1999d. Electric Power Annual 1998. Volumes I and II. Washington, DC: U. S. Department of Energy.

U. S. Department of Energy, Energy Information Administration ( EIA). 1996. Electric Power Annual 1995. Volumes I and II. Washington, DC: U. S. Department of Energy. 4 37 <IP_ADDRESS> Trends in the Electricity Market Beginning in the latter part of the 19th century and continuing for about 100 years, the prevailing view of policymakers and the public was that the government should use its power to require or prescribe the economic behavior of " natural monopolies" such as electric utilities. The traditional argument is that it does not make economic sense for there to be more than one supplier   running two sets of wires from generating facilities to end users is more costly than one set. However, since monopoly supply is not generally regarded as likely to provide a socially optimal allocation of resources, regulation of rates and other economic variables was seen as a necessary feature of the system.

Beginning in the 1970s, the public policy view shifted against traditional regulatory approaches and in favor of deregulation for many important industries including transportation, communications, finance, and energy. The major drivers for deregulation of electric power included the following:

existence of rate differentials across regions offering the promise of benefits from more efficient use of existing generation resources if the power can be transmitted across larger geographic areas than was typical in the era of industry regulation;

the erosion of economies of scale in generation with advances in combustion turbine technology;

complexity of providing a regulated industry with the incentives to make socially efficient investment choices;

difficulty of providing a responsive regulatory process that can quickly adjust rates and conditions of service in response to changing technological and market conditions; and

complexity of monitoring utilities' cost of service and establishing cost based rates for various customer classes that promote economic efficiency while at the same time addressing equity concerns of regulatory commissions.

Viewed from one perspective, not much changes in the electric industry with restructuring. The same functions are being performed, essentially the same resources are being used, and in a broad sense the same reliability criteria are being met. In other ways, the very nature of restructuring, the harnessing of competitive forces to perform a previously regulated function, changes almost everything. Each provider and each function become separate competitive entities that must be judged on their own.

This move to market based provision of generation services is not matched on the transmission and distribution side. Network interactions on AC transmission systems have made it impossible to have separate transmission paths compete. Hence, transmission and distribution remain regulated. Transmission Figure 4 3. Annual Electricity Sales by Sector 4 38 and generation heavily interact, however, and transmission congestion can prevent specific generation from getting to market. Transmission expansion planning becomes an open process with many interested parties. This open process, coupled with frequent public opposition to transmission expansion, slows transmission enhancement. The net result is greatly increased pressure on the transmission system. 4 39 Table 4 27. Key Parameters in the Cases Case Name Key Assumptions Cost Reduction and Efficiency Improvements Short Run Elasticity of Demand ( Percent) Natural Gas Prices Capacity Additions AEO97 Reference Case AEO97 Reference Case   AEO97 Reference Case As needed to meet demand No Competition No change from 1995   AEO97 Reference Case As needed to meet demand Flat Rates ( no time of use rates) AEO97 Reference Case   0.05 AEO97 Reference Case As needed to meet demand Moderate Consumer Response AEO97 Reference Case   0.15 AEO97 Reference Case As needed to meet demand High Consumer Response AEO97 Reference Case   0.50 AEO97 Reference Case As needed to meet demand High Efficiency Increased cost savings and efficiencies   0.15 AEO97 Reference Case As needed to meet demand No Capacity Additions AEO97 Reference Case   0.15 AEO97 Low Oil and Gas Supply Technology Case Not allowed High Gas Price AEO97 Reference Case   0.15 AEO97 High Oil and Gas Supply Technology Case As needed to meet demand Low Gas Price AEO97 Reference Case   0.15 AEO97 Reference Case As needed to meet demand High Value of Reliability AEO97 Reference Case   0.15 AEO97 Reference Case As needed to meet demand Half O& M AEO97 Reference Case   0.15 AEO97 Reference Case As needed to meet demand Intense Competition AEO97 Reference Case   0.15 AEO97 Reference Case As needed to meet demand 4 40 Restructuring of the electric power industry could result in any one of several possible market structures. In fact, different parts of the country will probably use different structures, as the current trend indicates. The eventual structure may be dominated by a power exchange, bilateral contracts, or a combination. A strong Regional Transmission Organization ( RTO) may operate in the area, or a vertically integrated utility may continue to operate a control area. In any case, several important characteristics will change:

Commercial provision of generation based services ( e. g., energy, regulation, load following, voltage control, contingency reserves, backup supply) will replace regulated service provision. This drastically changes how the service provider is assessed.

Individual transactions will replace aggregated supply meeting aggregated demand. It will be necessary to continuously assess each individual's performance.

Transaction sizes will shrink. Instead of dealing only in hundreds and thousands of MW, it will be necessary to accommodate transactions of a few MW and less.

Supply flexibility will greatly increase. Instead of services coming from a fixed fleet of generators, service provision will change dynamically among many potential suppliers as market conditions change.

References Haltmaier, Susan. 1998. " Electricity Production and Sales." In U. S. Industry & Trade Outlook ` 98, DRI/ McGraw Hill, Standard & Poor's, and U. S. Department of Commerce/ international Trade Administration. New York: McGraw Hill. pp. 5 1 to 5 9. 4 41 Lemm, Jamie. 2000. " Household Furniture." In U. S. Industry & Trade Outlook 2000. New York: DRI/ McGraw Hill, Standard & Poor's, and U. S. Department of Commerce/ International Trade Administration.

U. S. Department of Commerce, Bureau of the Census. 1995a. 1992 Census of Manufactures, Industry Series: Industrial Organic Chemicals. Washington, DC: Government Printing Office.

U. S. Department of Commerce, Bureau of the Census. 1995b. 1992 Concentration Ratios in Manufacturing. Washington, DC: Government Printing Office.

U. S. Department of Commerce, Bureau of the Census. 2001. " 1997 Economic Census   United States." As obtained on March 13, 2001. < http:// www. census. gov/ epcd/ ec97/ us/ US000_ 31. HTM>.

U. S. Department of Energy, Energy Information Administration ( EIA). 1998. The Changing Structure of the Electric Power Industry: Selected Issues, 1998. DOE/ EIA 0562( 98). Washington, DC: U. S. Department of Energy.

U. S. Department of Energy, Energy Information Administration ( EIA). 1999a. " Annual Energy Outlook 1999   Market Trend   Electricity." http:// www. eia. doe. gov/ oiaf/ aeo99/ electricity. html. As accessed November 15, 1999.

U. S. Department of Energy, Energy Information Administration ( EIA). 1999b. The Changing Structure of the Electric Power Industry 1999: Mergers and Other Corporate Combinations. Washington, DC: U. S. Department of Energy.

U. S. Department of Energy, Energy Information Administration ( EIA), Office of Integrated Analysis and Forecasting. 1999c. " Competitive Electricity Price Projections." http:// www. eia. doe. gov/ oia/ elepri97/ chap3. html. As obtained on November 15, 1999.

U. S. Department of Justice. 1992. Horizontal Merger Guidelines. Washington, DC: U. S. Department of Justice.

U. S. Environmental Protection Agency ( EPA), Office of Compliance Sector Notebook Project. 1995a. Profile of the Lumber and Wood Products Industry. Washington, DC.

U. S. Environmental Protection Agency ( EPA), Office of Compliance Sector Notebook Project. 1995b. Profile of the Pulp and Paper Industry. Washington, DC: U. S. Environmental Protection Agency.

U. S. Environmental Protection Agency ( EPA), Office of Compliance Sector Notebook Project. 1995c. Profile of the Organic Chemical Industry. Washington, DC: U. S. Environmental Protection Agency.

U. S. Environmental Protection Agency ( EPA). 1997a. EPA Office of Compliance Sector Notebook Project: Profile of the Pharmaceutical Manufacturing Industry. Washington, DC: U. S. Environmental Protection Agency. 5 42 U. S. Environmental Protection Agency ( EPA). 1997b. Regulatory Impact Analysis of Air Pollution Regulations: Utility and Industrial Boilers. Research Triangle Park, NC: U. S. Environmental Protection Agency.

CHAPTER 5 ECONOMIC ANALYSIS METHODOLOGY The rule to control emissions of HAPs from industrial, commercial, and institutional boilers and process heaters will affect almost all sectors of the U. S. economy. Several markets will bear the direct compliance costs. In addition, sectors that consume energy will also bear indirect costs through higher prices for energy. Finally, consumers of goods and services will experience impacts from higher market prices.

This chapter presents the methodology for analyzing the economic impacts of the NESHAP. This economic analysis provides the economic data and supporting information needed by EPA to support its regulatory determination. The methodology to operationalize this theory is based on microeconomic theory and the methods developed for earlier EPA studies. These methods are tailored to and extended for this analysis, as appropriate, to meet EPA's requirements for an EIA of controls placed on boilers and process heaters.

This methodology chapter includes background information on typical economic modeling approaches, the conceptual approach selected for this EIA, and an overview of the computerized market model used in the analysis with emphasis on the links between energy markets and the markets for goods and services. Appendix A of this RIA includes a description of the model's baseline data set and specifications.

5.1 Background on Economic Modeling Approaches 5 1 In general, the EIA methodology needs to allow EPA to consider the effects of the different regulatory alternatives. Several types of economic impact modeling approaches have been developed to support regulatory development. These approaches can be viewed as varying along two modeling dimensions:

the scope of economic decisionmaking accounted for in the model and

the scope of interaction between different segments of the economy.

Each of these dimensions was considered in determining the approach for this study. The advantages and disadvantages of different modeling approaches are discussed below.

5.1.1 Modeling Dimension 1: Scope of Economic Decisionmaking Models incorporating different levels of economic decisionmaking can generally be categorized as with behavior responses and without behavior responses ( accounting approach). Table 5 1 provides a brief comparison of the two approaches. The nonbehavioral approach essentially holds fixed all interactions between facility production and market forces. It assumes that firms absorb all control costs and consumers do not face any of the costs of regulation. Typically, engineering control costs are weighted by the number of affected units to develop " engineering" estimates of the total annualized costs. These costs are then compared to company or industry sales to determine the regulation's impact.

In contrast, the behavioral approach is grounded in economic theory related to producer and consumer behavior in response to changes in market conditions. Owners of affected facilities are economic agents that can, and presumably will, make adjustments such as changing production rates or altering input mixes that will generally affect the market environment in which they operate. As producers change their behavior in response to regulation, consumers are typically faced with changes in prices that cause them to alter the quantity that they are willing to purchase. In essence, this approach models the expected reallocation of society's resources in response to a regulation. The changes in price and production from the market level impacts are used to estimate the distribution of social costs between consumers and producers.

5.1.2 Modeling Dimension 2: Interaction Between Economic Sectors Table 5 1. Comparison of Modeling Approaches EIA With Behavioral Responses ° Incorporates control costs into production function ° Includes change in quantity produced ° Includes change in market price ° Estimates impacts for

affected producers

unaffected producers

consumers

foreign trade EIA Without Behavioral Responses ° Assumes firm absorbs all control costs ° Typically uses discounted cash flow analysis to evaluate burden of control costs ° Includes depreciation schedules and corporate tax implications ° Does not adjust for changes in market price ° Does not adjust for changes in plant production 5 2 Because of the large number of markets potentially affected by the regulation on boilers and process heaters, an issue arises concerning the level of sectoral interaction to model. In the broadest sense, all markets are directly or indirectly linked in the economy; thus, the regulation affects all commodities and markets to some extent. For example, controls on boilers and process heaters may indirectly affect almost all markets for goods and services to some extent because the cost of fuel ( an input in the provision of most goods and services) is likely to increase with the regulation in effect. However, the impact of rising fuel prices will differ greatly between different markets depending on how important fuel is as an input in that market.

The appropriate level of market interactions to be included in the EIA is determined by the scope of the regulation across industries and the ability of affected firms to pass along the regulatory costs in the form of higher prices. Alternative approaches for modeling interactions between economic sectors can generally be divided into three groups:

Partial equilibrium model: Individual markets are modeled in isolation. The only factor affecting the market is the cost of the regulation on facilities in the industry being modeled.

General equilibrium model: All sectors of the economy are modeled together. General equilibrium models operationalize neoclassical microeconomic theory by modeling not only the direct effects of control costs, but also potential input substitution effects, changes in production levels associated with changes in market prices across all sectors, and the associated changes in welfare economywide. A disadvantage of general equilibrium modeling is that substantial time and resources are required to develop a new model or tailor an existing model for analyzing regulatory alternatives.

Multiple market partial equilibrium model: A subset of related markets are modeled together, with intersectoral linkages explicitly specified. To account for the relationships and links between different markets without employing a full general equilibrium model, analysts can use an integrated partial equilibrium model. The multiple market partial equilibrium approach represents an intermediate step between a simple, single market partial equilibrium approach and a full general equilibrium approach. This approach involves identifying and modeling the most significant subset of market interactions using an integrated partial equilibrium framework. In effect, the modeling technique is to link a series of standard partial equilibrium models by specifying the interactions between supply functions and then solving for prices and quantities across all markets simultaneously. In instances where separate markets are closely related and there are strong interconnections, there are significant advantages to estimating market adjustments in different markets simultaneously using an integrated market modeling approach.

5.2 Selected Modeling Approach for Boilers and Process Heaters Analysis To conduct the analysis for the boilers and process heaters MACT, the Agency used a market modeling approach that incorporates behavioral responses in a multiple market partial equilibrium model as described above. This approach allows for a more realistic assessment of the distribution of impacts across different groups than the nonbehavioral approach, which may be especially important in accurately assessing the impacts of a significant rule affecting numerous industries. Because of the size and complexity of this regulation, it is important to use a behavioral model to examine the distribution of costs across society. Because the regulations on boilers and process heaters primarily affect energy costs, an input into many production processes, complex market interactions need to be captured to provide an accurate picture of the distribution of regulatory costs. Because of the large number of affected industries under this MACT, an appropriate model should include multiple markets and the interactions between them. Multiple market partial equilibrium analysis provides a manageable approach to incorporate interactions between energy markets and final product markets into the EIA to accurately estimate the regulation's impact. 6These markets are defined at the two and three digit NAICS code level. This allows for a fairly disaggregated examination of the regulation's impact on producers. However, if the costs of the regulation are concentrated on a particular subset of one of these markets, then treating the cost as if it fell on the entire NAICS code may still underestimate the impacts on the subset of producers affected by the regulation.

5 3 The model used for this analysis includes energy, agriculture, manufacturing, mining, commercial, and transportation markets affected by the controls placed on boilers and process heaters. 6 The energy markets are divided into natural gas, petroleum products, coal, and electricity. The residential sector is treated as a single representative demander in the energy markets.

Figure 5 1 presents an overview of the key market linkages included in the economic impact model used for analyzing the boilers and process heaters MACT. The analysis' emphasis is on the energy supply chain and the consumption of energy by producers of goods and services. The industries most directly affected by the boilers and process heaters MACT are the electricity industry, chemical industry and pulp and paper industry. However, changes in the equilibrium prices and quantities of energy and goods and services affect all sectors of the economy. ( See Figure 5 1.) This analysis explicitly models the linkages between these market segments to capture both the direct costs of compliance and the indirect costs due to changes in prices. For example, production costs will increase for chemical companies using boilers and process heaters as a result of the capital investments and monitoring costs, as well as the resulting increase in the price of electricity used as an energy input in the production process.

The economic model also captures behavioral changes of producers of goods and services that feedback into the energy markets. Changes in production levels and fuel switching in the manufacturing process affect the demand for Btus in fuel markets. The change in output is determined by the size of the cost increase per Btu ( typically variable cost per output), the facility's production function ( slope of supply curve), and the demand characteristics of the facility's downstream market ( other market suppliers and market demanders). For example, if consumers' demand for a product is not very sensitive to price, then producers can pass the majority of the cost of the regulation through to consumers and output may not change appreciably. However, if only a small proportion of market output is produced by producers affected by the regulation, then competition will prevent the affected producers from raising their prices significantly.

One possible feedback pathway that this analysis does not model is technical changes in the manufacturing process. For example, if the cost of Btus increases, a facility may use measures to increase manufacturing efficiency or capture waste heat. Facilities could also possibly change the 5 4   demand oil Oil Supply Exogenous Demand Endogenous   demand NG Gas   demand coal Coal Industry A Btu Production Manufacturing Process Industry B Regulatory Costs Energy Consumption Fuel Markets   supply product A Product A Supply Endogenous Demand Exogenous Goods and Services Markets Industry Z Residential Households Commercial Businesses   demand elec Electricity Electricity Market Supply Exogenous Demand Endogenous     Transportation Figure 5 1. Links Between Energy and Goods and Services Markets 5 5 input mix that they use, substituting other inputs for fuel. These facility level responses will also act to reduce pollution, but including these responses is beyond the scope of this analysis.

5.2.1 Directly Affected Markets Markets where boilers and process heaters are used as an input to production are considered to be directly affected. As outlined in Chapter 3, facilities using several types of boilers or process heaters will be required to add controls. In addition, a larger population of boilers and process heaters will incur monitoring costs to comply with the regulation. Therefore, the regulation will increase their production costs and cause these directly affected firms to reduce the quantity that they are willing to supply at any given price.

<IP_ADDRESS> Electricity Market Boilers are used to generate power throughout the electricity industry. Even though utility boilers are not covered under this regulation, the Agency estimates over 300 industrial, commercial, and institutional boilers involved in providing electric services ( SIC 4911/ NAICS22111) will be affected. Most of these are owned by municipal electric service providers.

For this study, the electricity market was modeled as a nationally competitive market. The electricity market is modeled this ways primarily due to tractability concerns. Given the difficulty in ascertaining how many States would decide to deregulate their electricity markets, a competitive electricity market was the most reasonable approach for this modeling exercise. The direct costs of compliance on affected boilers lead to an upward shift in the total market supply for electricity. Figure 5 2 illustrates the shifts in the supply curve for a representative energy market. In addition to the direct costs, the market for electricity will also be indirectly affected through changes in fuel prices. Electricity generators are extremely large consumers of coal, natural gas, and petroleum products. For example, some of the impact of control costs on the petroleum industry will be on the electricity industry in the form of higher prices. Indirect costs will also lead to an upward shift in the supply curve.

The demand for electricity is derived by aggregating across the goods and services markets and the residential sector. Because of direct compliance costs on the goods and services markets, the demand curve for electricity will shift downward. Therefore, it is ambiguous whether equilibrium quantity will rise or fall. The changes in the price and quantity are determined by the relative magnitude of the shifts in the price elasticities of the supply and demand curves. 5 6 P 1 P 0 Q 11 Q 10 ( a) Producers bearing control costs ( affected) S 11 S 10 $

Quantity $ $

Quantity Q 20 Q 21 ( b) Producers bearing no control costs ( unaffected) S 20 Quantity ( c) Total Market Q T1 Q T0 D S T0 S T1 P0 = market price without regulation P1 = market price with regulation S10 = supply function for affected firms without regulation S11 = supply function for affected firms with regulation Q10 = quantity sold for affected firms without regulation Q11 = quantity sold for affected firms with regulation S20 = supply function for unaffected firms both with and without regulation Q20 = quantity sold for unaffected firms without regulation Q21 = quantity sold for unaffected firms with regulation ST0 = total market supply function without regulation ST1 = total market supply function with regulation QT0 = total market quantity sold without regulation QT1 = total market quantity sold with regulation Figure 5 2. Market Effects of Regulation Induced Costs <IP_ADDRESS> Petroleum Market Control costs associated with boilers and process heaters will increase the cost of refining petroleum products. The supply curve for petroleum products will shift upward by the proportional increase in total production costs caused by the control costs on boilers and process heaters. For petroleum products, a single composite product was used to model market adjustment because boilers and process heaters are used throughout the refinement process, from distillation to reformulation. In addition, examining the full heterogeneity of petroleum products and the impacts to all specific end products would require a model of much greater complexity than this one. As a result, assigning costs to specific end products and estimating economic impacts to them, such as fuel oil # 2 or reformulated gasoline, is difficult. The use of a composite product tends to understate the impacts for petroleum products where compliance costs as a percentage of production costs are greater than average and overstate impacts for products where compliance costs as a percentage of production costs are less than average. 5 7 Btu Production Decision Output Market   Fuel Use   Output   $/ Btu Production Decision $/ Btu   $/ Btu Fuel Markets Compliance Costs Figure 5 3. Fuel Market Interactions with Facility Level Production Decisions <IP_ADDRESS> Goods and Services Markets: Agriculture, Manufacturing, Mining, Commercial, and Transportation Many manufacturing facilities use boilers and process heaters in their production processes to generate steam and process heat. Commercial entities use boilers for space heating and to generate supplementary electricity. In addition to the direct costs of the regulation, goods and services markets are indirectly affected through price increases in the energy markets.

Directly affected producers are segmented into sectors defined at the two or three digit NAICS code level. A partial equilibrium analysis was conducted for each sector to model the supply and demand. Changes in production levels and fuel switching due to the regulation's impact on the price of Btus were then linked back into the energy markets.

The impact of the regulation on producers in these sectors was modeled as an increase in the cost of Btus used in the production process. In this context, Btus refer to the generic energy requirements used to generate process heat, process steam, or shaft power. Compliance costs associated with the regulation will increase the cost of Btu production in the manufacturing sectors. The cost of Btu production for industry increases because of both direct control costs on boilers and process heaters owned by manufacturers, and increases in the price of fuels. Because Btus are an input into the production process, these price increases lead to an upward shift in the facility ( and industry) supply curves as shown in Figure 5 2, leading to a change in the equilibrium market price and quantity.

The changes in equilibrium supply and demand in each market are modeled to estimate the regulation's impact on each sector. In a perfectly competitive market, the point where supply equals demand determines the market price and quantity, so market price and quantity are determined by solving the model for the price where the quantity supplied and the quantity demanded are equal. The size of the regulation induced shifts in the supply curve is a function of the total direct control costs associated with boilers and process heaters and the indirect fuel costs ( determined by the change in fuel price and intensity of use) in each goods and services market. The proportional shift in the supply curve is determined by the ratio of total control costs ( both direct and indirect) to total revenue.

This impact on the price of Btus facing industrial users feeds back to the fuel market in two ways ( see Figure 5 3). The first is through the company's input decision concerning the fuel( s) that will be used for its manufacturing process. As the cost of Btus increases, firms may switch fuels and/ or change production processes to increase energy efficiency and reduce the number of Btus required per unit of output. Fuel switching impacts were modeled using cross price elasticities of demand between energy sources. For example, a cross price elasticity of demand between natural gas and electricity of 0.5 implies that a 1 percent increase in the price of electricity will lead to a 0.5 percent increase in the demand for 7Long run production decisions of fuel switching and increased energy efficiency are captured by the crossand own price elasticities in the energy markets.

5 8 natural gas. Own price elasticities of demand are used to estimate the change in the use of fuel by demanders. For example, a demand elasticity of   0.175 for electricity implies that a 1 percent increase in the price of electricity will lead to a 0.175 percent decrease in the quantity of electricity demanded.

The second feedback pathway to the energy markets is through the facility's change in output. Because Btus are an input into the production process, energy price increases lead to an upward shift in the facility supply curves ( not modeled individually). This leads to an upward shift in the industry supply curve when the shifts at the facility level are aggregated across facilities. A shift in the industry supply curve leads to a change in the equilibrium market price and quantity. In a perfectly competitive market, the point where supply equals demand determines the new market price and quantity. The Agency modeled the feedback into the energy market by assuming that the percentage change in output in the manufacturing sectors translates into a equivalent percentage change in the demand for energy ( Btus). This implies that there are constant returns to scale from energy inputs in the manufacturing process over the relevant range of output and time period of analysis. This is an appropriate assumption for this analysis because the output changes in these sectors being modeled are relatively small ( always less than 1 percent) and reflect short run production decisions. 7 The Agency assumed that the demand curves for goods and services in all sectors are unchanged by the regulation. However, because the demand function quantifies the change in quantity demanded in response to a change in price, the baseline demand conditions are important in determining the regulation's impact. The key demand parameters are the elasticities of demand with respect to changes in the price of goods and services. For these markets, a " reasonable" range of elasticity values is assigned based on estimates from similar commodities. Because price changes are anticipated to be small, the point elasticities at the original price and quantity should be applicable throughout the relevant range of prices and quantities examined in this model.

For more information on how these energy markets are modeled in this analysis, please refer to Appendix B of the RIA.

5.2.2 Indirectly Affected Markets In addition to the many markets that are directly affected by the regulation on boilers and process heaters, some markets feel the regulation's impacts despite having no direct costs resulting from the regulation. Firms in these markets generally face changes in the price of energy that affect their production decisions.

<IP_ADDRESS> Market for Coal The coal market is not directly affected by the regulation, but it has the potential to be significantly affected through indirect costs. Although boilers and process heaters are not commonly used in the production or transportation of coal, the supply of coal will be affected by the price of energy used in coal production. However, the indirect impacts on coal production costs are relatively small compared to the direct impacts on the production costs in the electricity and petroleum markets; thus, the " relative" price of coal ( per Btu) will decrease compared with other energy sources.

The demand for coal from the industrial sectors will be affected by differences in compliance costs by fuel type applied to boilers and process heaters in the industrial sectors. Because compliance costs are high for coal fired units, manufacturers will switch away from coal units toward natural gas units with lower compliance costs. However, the overall impact on the demand for coal is ambiguous because the relative increase in the cost of producing Btus by burning coal will be offset by the relative decrease in the price of coal. Similarly, the demand for coal by utility generators will be affected through changes in the relative price of alternative ( noncoal) energy sources and direct costs on coal boilers.

<IP_ADDRESS> Natural Gas Market The natural gas market is included in the economic model to complete coverage of the energy markets. EPA projects that there are no direct and minimal indirect impacts on the production costs of natural gas. However, the demand for natural gas will increase because of the relative decrease in the price of natural gas and the lower relative compliance costs for gas fired boilers and process heaters. 5 9 <IP_ADDRESS> Goods and Services Markets Some goods and services markets do not include any boilers or process heaters and are therefore not directly affected by the regulation. However, these markets will still be affected indirectly because of the changes in energy prices that they will face following the regulation. There will be a tendency for these users to shift away from electricity and petroleum products and towards natural gas and coal.

<IP_ADDRESS> Impact on Residential Sector The residential sector does not bear any direct costs associated with the regulation because this sector does not own boilers or process heaters. However, they bear indirect costs due to price increases. The residential sector is a significant consumer of electricity, natural gas, and petroleum products used for heating, cooling, and lighting, as well as many other end uses. The change in the quantity of energy demanded by these consumers in response to changes in energy prices is modeled as a single demand curve parameterized by demand elasticities for residential consumers obtained from the literature.

5.3 Operationalizing the Economic Impact Model Figure 5 4 illustrates the linkages used to operationalize the estimation of economic impacts associated with the compliance costs. Compliance costs placed on boilers and process heaters shift the supply curve for electricity and petroleum products. Adjustments in the electricity and petroleum energy markets determine the share of the cost increases that producers ( electric service providers and petroleum companies) and consumers ( product manufacturers, commercial business, and residential households) bear.

The supply and demand relationships between the energy markets are fully modeled. For example, changes in electricity production feed back and affect the demand for coal, natural gas and petroleum products. Similar changes in refinery production affect the petroleum industry's demand for electricity.

Manufacturers experience supply curve shifts due to control costs on affected boilers and process heaters they operate and changes in prices for natural gas, petroleum, electricity, and coal. The share of these costs borne by producers and consumers is determined by the new equilibrium price and quantity in the goods and services markets. Changes in manufacturers' Btu demands due to fuel switching and changes in production levels feed back into the energy markets.

Adjustments in price and quantity in all markets occur simultaneously. A computer model was used to numerically simulate market adjustments by iterating over commodity prices until equilibrium is reached ( i. e., until the quantity supplied equals the quantity demanded in all markets being modeled). Using the results provided by the model, economic impacts of the regulation ( changes in consumer and producer surplus) were estimated for all sectors of the economy being modeled. 5 10   demand elec Electricity Electricity Market   demand oil Oil Assume Supply Model Demand   demand NG Gas   demand coal Coal Industry A Btu Production Manufacturing Process Industry Z Industry B Regulatory Costs (   Fuel Prices)

P   Q Q Energy Consumption Goods and Services Markets Fuel Markets Fuel Prices Fuel Prices Fuel Prices Fuel Prices   Production Process ( Fuel Switching)   Production Levels Supply Price P = market price of output Q = quantity sold of output     Transportation Commercial Businesses Fuel Prices Regulatory Costs Fuel Prices Residential Households Figure 5 4. Operationalizing the Estimation of Economic Impact 8Pechan reports the results of their literature review in Appendix B. Point estimates are provided by SIC code.

5 11 5.3.1 Computer Model The computer model comprises a series of computer spreadsheet modules. The modules integrate the engineering cost inputs and the market level adjustment parameters to estimate the regulation's impact on the price and quantity in each market being analyzed. At the heart of the model is a market clearing algorithm that compares the total quantity supplied to the total quantity demanded for each market commodity.

Current prices and production levels are used to calibrate the baseline scenario ( without regulation) for the model. Then, the compliance costs associated with the regulation are introduced as a " shock" to the system, and the supply and demand for market commodities are allowed to adjust to account for the increased production costs resulting from the regulation. Using an iterative process, if the supply does not equal demand in all markets, a new set of prices is " called out" and sent back to producers and consumers to " ask" what quantities they would supply and demand based on these new prices. This technique is referred to as an auctioneer approach because new prices are continually called out until an equilibrium set of prices is determined ( i. e., where supply equals demand for all markets).

Supply and demand quantities are computed at each price iteration. The market supply for each market is obtained by using a mathematical specification of the supply function, and the key parameter is the point elasticity of supply at the baseline condition. Supply elasticities are traditionally the most difficult to obtain from prior sources and analyses. As a result, EPA used an assumed value of 0.75 for 21 of the 25 manufacturing, agriculture, other mining, transportation, and commercial industries. The remaining 4 supply elasticities ( for the textile mills, textile products, primary metals, and other mining industries) were obtained from a previous report conducted for EPA by E. H. Pechan and Associates, Inc ( 1997), and studies by Warfield, et al ( 2001) and the U. S. International Trade Commission ( 2001) 8. EPA is currently using the last two studies to study the economic impacts of MACT standards for the Fabric Coatings, Taconite, and Steel Industries. Table 5 2 lists the supply elasticities for the markets used in the model.

The demand curves for the energy markets are the sum of demand responses across all markets. The demand for energy in the manufacturing sectors is a derived demand calculated using baseline energy usage and changes associated with fuel switching and changes in output levels. Similarly, the energy demand in residential sectors is obtained through mathematical specification of a demand function ( see Appendix A).

The demand for goods and service in the two and three digit NAICS code manufacturing sectors is obtained by using a mathematical specification of the demand function. Demand elasticity estimates are more readily available from literature searches. The majority of demand elasticities for the manufacturing sectors were obtained from the E. H. Pechan and Associates, Inc. report ( 1997) prepared for the RIA of the PM NAAQS in 1997. This document reports results of a substantive literature search for elasticity estimates for use in conducting an analysis of the NAAQS. Point estimates are reported for 22 of the 25 and are derived from previous EPA analyses and selected working papers. Absent information for the remaining 3 industries ( the transportation, construction, and commercial sectors), we have assumed a demand elasticity value of  1.0. Table 5 2 lists the demand elasticities for the markets used in the model.

EPA modeled fuel switching using secondary data developed by the U. S. Department of Energy for the National Energy Modeling System ( NEMS). Table 5 3 contains fuel price elasticities of demand for electricity, natural gas, petroleum products, and coal. The diagonal elements in the table represent ownprice elasticities. For example, the table indicates that for steam coal, a 1 percent change in the price of coal will lead to a 0.499 percent decrease in the use of coal. The off diagonal elements are cross price elasticities and indicate fuel switching propensities. For example, for steam coal, the second column indicates that a 1 percent increase in the price of coal will lead to a 0.061 percent increase in the use of natural gas.

5.3.2 Calculating Changes in Social Welfare The boilers and process heaters MACT will impact almost every sector of the economy, either directly through control costs or indirectly through changes in the price of energy and final products. For 5 12 example, a share of control costs that originate in the energy markets is passed through the goods and services markets and borne by both the producers and consumers of their products. 5 13 Table 5 2. Supply and Demand Elasticities Supply Elasticities Demand Elasticities Industrial Residentiala Transportation Commercial Petroleum 0.58b Derived   0.28 Derived Derived Natural Gas 0.41b Derived   0.26 Derived Derived Electricity 0.75c Derived   0.23 Derived Derived Coal 1.00b Derived   0.26 Derived Derived NAICS Description Supplyd Demandd 311 Food 0.75c   0.30 312 Beverage and Tobacco Products 0.75c   1.30 313 Textile Mills 0.37e   0.85e 314 Textile Product Mills 0.37e   0.85e 315 Apparel 0.75c   1.80 316 Leather and Allied Products 0.75c   1.20 321 Wood Products 0.75d   0.20 322 Paper 1.20c   1.09 323 Printing and Related Support 0.75c   1.80 325 Chemicals 0.75c   1.50 326 Plastics and Rubber Products 0.75c   1.80 327 Nonmetallic Mineral Products 0.75c   0.90 331 Primary Metals 3.50f   0.80 332 Fabricated Metal Products 0.75c   0.20 333 Machinery 0.75c   0.50 334 Computer and Electronic Products 0.75c   0.30 335 Electrical Equipment, Appliances, and Components 0.75c   0.50 336 Transportation Equipment 0.75c   1.00c 337 Furniture and Related Products 0.75c   3.40 339 Miscellaneous 0.75c   0.60 11 Agricultural Sector 0.75c   1.80 ( continued) 5 14 To estimate the total change in social welfare without double counting impacts across the linked partial equilibrium markets being modeled, EPA quantified social welfare changes for the following categories:

change in producer surplus in the energy markets;

change in producer surplus in the goods and services markets;

change in consumer surplus in the goods and services markets; and

change in consumer surplus in the residential sector.

Figure 5 5 illustrates the change in producer and consumer surplus in the intermediate energy market and the goods and services markets. For example, assume a simple world with only one energy market, wholesale electricity, and one product market, pulp and paper. If the regulation increases the cost of generating wholesale electricity, then part of the cost of the regulation will be borne by the electricity producers as decreased producer surplus, and part of the costs will be passed on to the pulp and paper manufacturers. In Figure 5 5( a), the pulp and paper manufacturers are the consumers of electricity, so the change in consumer surplus is displayed. This change in consumer surplus in the energy market is captured by the product market ( because the consumer is the pulp and paper industry in this case), where it is split between consumer surplus and producer surplus in those markets. Figure 5 5( b) shows the change in producer surplus in the energy market, where B represents an increase in producer surplus and C represents a decrease. Table 5 2. Supply and Demand Elasticities ( continued)

NAICS Description Supplyd Demandd 23 Construction Sector 0.75c   1.00c 21 Other Mining Sector 0.43   0.30 48 Transportation 0.75c   0.70 Commercial Commercial 0.75c   1.00c a U. S. Department of Energy, Energy Information Administration ( EIA). " Issues in Midterm Analysis and Forecasting 1999   Table 1." < http:// www. eia. doe. gov/ oaif/ issues/ pricetbl1. html>. As obtained on May 8, 2000a.

b Dahl, Carol A., and Thomas E. Duggan. 1996. " U. S. Energy Product Supply Elasticities: A Survey and Application to the U. S. Oil Market." Resource and Energy Economics18: 243 263.

c Assumed value.

d E. H. Pechan & Associates, Inc. 1997. Qualitative Market Impact Analysis for Implementation of the Selected Ozone and PM NAAQS. Appendix B. Prepared for the U. S. Environmental Protection Agency.

e Warfield, et al. 2001. " Multifiber Arrangement Phaseout: Implications for the U. S. Fibers/ Textiles/ Fabricated Products Complex." www. fibronet. com. tw/ mirron/ ncs/ 9312/ mar. html> As obtained September 19, 2001.

f U. S. International Trade Commission ( USITC). November 21, 2001. Memorandum to the Commission from Craig Thomsen, John Giamalua, John Benedetto, Joshua Levy, International Economists. Investigation No. TA 201 73: STEEL Remedy Memorandum. 5 15 As shown in Figures 5 5( c) and 5 5( d), the cost affects the pulp and paper industry by shifting up the supply curve in the pulp and paper market. These higher electricity prices therefore lead to costs in the pulp and paper industry that are distributed between producers and consumers of paper products in the form of lower producer surplus and lower consumer surplus. Note that the change in consumer surplus in the intermediate energy market must equal the total change in consumer and producer surplus in the product market. Thus, to avoid double counting, the change in consumer surplus in the intermediate energy market was not quantified; instead the total change in social welfare was calculated as Change in Social Welfare =    PSE +    PSF +    CSF +    CSR ( 5.1) Table 5 3. Fuel Price Elasticities Inputs Own and Cross Elasticities Electricity Natural Gas Coal Residual Distillate Electricity   0.074 0.092 0.605 0.080 0.017 Natural Gas 0.496   0.229 1.087 0.346 0.014 Steam Coal 0.021 0.061   0.499 0.151 0.023 Residual 0.236 0.036 0.650   0.587 0.012 Distillate 0.247 0.002 0.578 0.044   0.055 Source: U. S. Department of Energy, Energy Information Administration ( EIA). January 2000b. Model Documentation Report: Industrial Sector Demand Module of the National Energy Modeling System. DOE/ EIA M064( 2000). Washington, DC: U. S. Department of Energy. 5 16 S D S

D ( a) Change in Consumer Surplus in the Energy Market ( c) Change in Consumer Surplus in Goods and Services Markets ( b) Change in Producer Surplus in the Energy Market ( d) Change in Producer Surplus in Goods and Services Markets P P 2 Q P 1 Q 2 Q 1 S D S

P P B Q P A Q B Q A S D S  P P B Q P A Q B Q A P P 2 Q P 1 Q 2 Q 1 S D S

A B C E F Figure 5 5. Changes in Economic Welfare with Regulation where   PSE = change in producer surplus in the energy markets;

  PSF = change in producer surplus in the goods and services markets;

  CSF = change in consumer surplus in the goods and services markets; and   CSR = change in consumer surplus in the commercial, residential, and transportation energy markets.

Appendix A contains the mathematical algorithms used to calculate the change in producer and consumer surplus in the appropriate markets. The market analysis is conducted for the year 2005 and incorporates both growth in supply and demand. The data for 2005 are based on projections of Department of Energy data and Census data, as well as projections based on the engineering data used in preparing the profile data 6 17 that is an input to this analysis. Appendix A contains more information on the specific data sets and how they are used to construct a baseline data set for 2005 for use in this analysis. Both new and existing sources are evaluated using the same analysis approach.

Appendix B contains a list of key assumptions that underlie the model used to calculate economic impacts in this report, and also the results of sensitivity analyses conducted which reflect the outcomes from varying key parameters such as demand and supply elasticities.

The engineering control costs presented in Chapter 3 are inputs ( regulatory " shocks") in the market model approach. The magnitude and distribution of the regulatory costs' impact on the economy depend on the relative size of the impact on individual markets ( relative shift of the market supply curves) and the behavioral responses of producers and consumers in each market ( measured by the price elasticities of supply and demand).

CHAPTER 6 ECONOMIC IMPACT ANALYSIS RESULTS The underlying objective of the EIA is to evaluate the effect of the regulation on the welfare of affected stakeholders and society in general. Although the engineering cost analysis presented in Chapter 3 does represent an estimate of the resources required to comply with the rule under baseline economic conditions, the analysis does not account for the fact that the regulations may cause the economic conditions to change. For instance, producers may reduce production in the face of higher production costs, thereby reducing market supply. Moreover, the control costs may be passed along to other parties through various economic exchanges. Therefore, EPA developed an analytical structure and economic model to measure and 6 1 track these effects ( described in detail in Chapter 5 and the economic impact analysis). In this section, we report quantitative estimates of these welfare impacts and their distribution across stakeholders. This includes the impact on energy markets as well.

6.1 Results in Brief The economic impacts associated with the rule are relatively low. Price increases of less than 0.02 percent are expected to occur across the many products, both energy and manufacturing, that will be affected by this rule. Reductions in output are expected to be about 0.02 percent, also. Manufacturing industries such as paper, wood products, and textiles are expected to be the most impacted. Energy prices and outputs will also experience small changes, with the largest change in energy price being a 0.05 percent increase in electricity rates. While the price and output changes associated with Option 1A are also low, the social costs increase by over $ 1 billion.

6.2 Social Cost Estimates Table 6 1 summarizes the economic impact estimates for existing and new source units. Under the MACT floor alternative, EPA estimates the total change in social welfare is estimated to be $ 862.9 million. Under the Option 1A, welfare impacts are over twice as high as the MACT floor alternative with social welfare changes estimated to equal $ 1,995.5 million. Both of these estimates are slightly smaller ( less than $ 0.3 million) than the estimated baseline engineering costs as a result of behavior changes by producers and consumers that reflect lower cost alternatives. Possible behavior responses include changes in consumption and production patterns and fuel switching.

EPA also estimated the distribution of social costs between producers and consumers and report the distribution of impacts across sectors/ markets in Tables 6 2 and 6 3. Values in the text are impacts from the floor alternative; those in parentheses are impacts from the Option 1A alternative. The market analysis estimates that consumers will bear $ 414.3 million ($ 955.3 million), or 48 ( 48) percent of the total social cost, because of the increased prices and lower consumption levels in these markets. Producer surplus is projected to decrease by $ 448.7 million ($ 1,040.2 million), or 52 ( 52) percent of the total social cost as result of direct control costs, higher energy costs, and reductions in output.

With exception of the natural gas market, energy producers are expected to experience producer surplus losses. Under the MACT floor, electricity, petroleum, and coal producer surplus is projected to decline by approximately $ 35 million. This value increases to $ 113 million under Option 1A. In contrast, natural gas producer surplus is projected to increase by $ 2 to $ 4 million as they benefit from increased demand from industries switching from petroleum and electricity.

The majority welfare impacts fall on the agriculture, manufacturing, and mining industries. EPA estimates total welfare losses of $ 609.8 million ($ 1,444.3 million) for these sectors. Manufacturing Table 6 1. Social Cost Estimates ($ 1998 106)

Change in Social Welfare, MACT Floor Change in Social Welfare, Option 1A Baseline engineering costs $ 863.0 $ 1,995.8 Social costs with market adjustments $ 862.9 $ 1,995.5 Difference between engineering and social costs $ 0.1 $ 0.3 6 2 industries with large number of boilers and process heaters and industries that consume electricity experience the majority these losses ( e. g., chemicals and allied products, paper, textile mill products, and food). Consumers in these industries experience losses of $ 295.2 million ($ 709.9 million) and producers bear $ 314.6 million ($ 734.4 million). The cost of this rule to producers as a percentage of baseline 2005 shipments is 0.011 ( 0.026) percent.

EPA also examined the impact on the commercial, transportation and residential sectors. The total welfare loss for the commercial sector is estimated to be $ 167.1 million ($ 301.8 million). Therefore, the regulatory burden associated with the MACT is estimated as 0.001 ( 0.002) total 2005 commercial sector revenues. Consumers in this sector bear approximately $ 71.6 million ($ 129.3 million) and producers bear $ 95.5 million ($ 172.5 million) of these impacts. In contrast, the total welfare loss for the transportation sector is estimated to be $ 9.0 million ($ 46.5 million). The regulatory burden associated with the rule is estimated as 0.003 ( 0.015) percent of total 2005 6 3 Table 6 2. Distribution of Social Costs by Sector/ Market: Floor Alternative ($ 1998 106)

Change in: Sectors/ Marke ts Producer Surplus Consumer Surplus Social Welfare Energy Markets Petroleum   $ 1.9 Natural gas $ 4.1 Electricity   $ 33.7 Coal   $ 2.7 Subtotal   $ 34.2 NAICS Code SIC Code Description 311 20 ( pt) Food   $ 28.2   $ 11.3   $ 39.4 312 20 ( pt); 21 Beverage and Tobacco Products   $ 2.4   $ 4.1   $ 6.5 313 22 ( pt) Textile Mills   $ 22.7   $ 52.0   $ 74.7 314 22 ( pt) Textile Product Mills   $ 0.1   $ 0.1   $ 0.2 315 23 Apparel   $ 0.4   $ 1.1   $ 1.5 316 31 Leather and Allied Products   $ 0.3   $ 0.4   $ 0.7 321 24 Wood Products   $ 39.1   $ 10.4   $ 49.5 322 26 Paper   $ 66.1   $ 60.0   $ 126.1 323 27 Printing and Related Support   $ 0.2   $ 0.4   $ 0.6 325 28 Chemicals   $ 40.9   $ 81.8   $ 122.8 326 30 Plastics and Rubber Products   $ 2.2   $ 5.4   $ 7.6 327 32 Nonmetallic Mineral Products   $ 3.4   $ 4.0   $ 7.4 331 33 Primary Metals   $ 25.2   $ 5.7   $ 30.9 332 34 Fabricated Metal Products   $ 8.5   $ 2.3   $ 10.8 333 35 Machinery   $ 7.3   $ 4.9   $ 12.2 334 36 ( pt) Computer and Electronic Products   $ 3.6   $ 1.4   $ 5.0 335 36 ( pt) Electrical Equipment, Appliances, and Components   $ 2.5   $ 1.6   $ 4.1 336 37 Transportation Equipment   $ 24.6   $ 32.8   $ 57.3 337 25 Furniture and Related Products   $ 5.4   $ 24.6   $ 30.1 339 39 Miscellaneous   $ 0.8   $ 0.7   $ 1.5 11 01 08 Agricultural Sector   $ 0.6   $ 1.3   $ 1.9 23 15 17 Construction Sector   $ 0.8   $ 1.1   $ 1.9 21 10; 14 Other Mining Sector   $ 10.1   $ 7.0   $ 17.2 48 40 47 ( pt) Transportation   $ 4.7   $ 4.3   $ 9.0 42; 44 45; 49; 51 56; 61 62; 71 72; 81 40 48 ( pt); 50 99 Commercial   $ 71.6   $ 95.5   $ 167.1 Residential NA   $ 42.7   $ 42.7 Grand Total   $ 414.3   $ 448.7   $ 862.9 NA = Not applicable. 6 4 Table 6 3. Distribution of Social Costs by Sector/ Market: Option 1A Alternative ($ 1998 106)

Change in: Sectors/ Marke ts Producer Surplus Consumer Surplus Social Welfare Energy Markets Petroleum   $ 27.3 Natural gas $ 2.4 Electricity   $ 79.5 Coal   $ 6.4 Subtotal   $ 110.8 NAICS Code SIC Code Description 311 20 ( pt) Food   $ 90.0   $ 36.0   $ 126.0 312 20 ( pt); 21 Beverage and Tobacco Products   $ 5.4   $ 9.3   $ 14.7 313 22 ( pt) Textile Mills   $ 45.0   $ 103.2   $ 148.2 314 22 ( pt) Textile Product Mills   $ 0.1   $ 0.3   $ 0.4 315 23 Apparell   $ 0.9   $ 2.1   $ 3.0 316 31 Leather and Allied Products   $ 2.7   $ 4.3   $ 7.1 321 24 Wood Products   $ 72.0   $ 19.2   $ 91.2 322 26 Paper   $ 173.1   $ 157.2   $ 330.3 323 27 Printing and Related Support   $ 0.4   $ 1.0   $ 1.4 325 28 Chemicals   $ 102.4   $ 204.7   $ 307.1 326 30 Plastics and Rubber Products   $ 6.1   $ 14.6   $ 20.7 327 32 Nonmetallic Mineral Products   $ 9.1   $ 10.9   $ 20.0 331 33 Primary Metals   $ 59.5   $ 13.6   $ 73.1 332 34 Fabricated Metal Products   $ 18.6   $ 5.0   $ 23.6 333 35 Machinery   $ 17.1   $ 11.4   $ 28.5 334 36 ( pt) Computer and Electronic Products   $ 12.0   $ 4.8   $ 16.8 335 36 ( pt) Electrical Equipment, Appliances, and Components   $ 11.7   $ 7.8   $ 19.6 336 37 Transportation Equipment   $ 47.8   $ 63.7   $ 111.4 337 25 Furniture and Related Products   $ 9.2   $ 41.8   $ 51.0 339 39 Miscellaneous   $ 3.2   $ 2.5   $ 5.7 11 01 08 Agricultural Sector   $ 1.5   $ 3.6   $ 5.1 23 15 17 Construction Sector   $ 3.2   $ 4.3   $ 7.5 21 10; 14 Other Mining Sector   $ 18.9   $ 13.1   $ 32.0 48 40 47 ( pt) Transportation   $ 24.1   $ 22.5   $ 46.5 42; 44 45; 49; 51 56; 61 62; 71 72; 81 40 48 ( pt); 50 99 Commercial   $ 129.3   $ 172.5   $ 301.8 Residential NA   $ 92.0   $ 92.0 Grand Total   $ 955.3   $ 1,040.2   $ 1,995.5 6 5 transportation sector revenues. Transportation consumers bear approximately $ 4.7 million ($ 24.1 million) and producers bear $ 4.3 million ($ 22.5 million) of these impacts. Finally, the social cost burden to residential consumers of energy, $ 42.7 million ($ 92.0 million), is 0.037 ( 0.078) percent of annual residential energy expenditures in 2005.

Sensitivity analyses of how social costs behave with changes in the demand and supply elasticities are available in Appendix B.

6.3 National Market Level Impacts Increases in the costs of production in the energy and final product markets due to the regulation are expected to result in changes in prices, production, and consumption from baseline levels. As shown in Table 6 4, the electricity market price increases by 0.050 ( 0.108) percent, while production/ consumption decreases by 0.011 ( 0.026) percent as a result of additional control costs. A significant share of electricity is produced in the United States using coal as a primary input. Therefore, projected reductions in electricity production also lead to a decrease in demand for coal. As a result, the price and quantities of coal are projected to fall by 0.007 ( 0.020) percent and 0.010 ( 0.024) percent, respectively. In the petroleum market, the model projects small price and quantity effects ( i. e., less than 0.01 percent). In the natural gas market, the model projects the market price will rise in response to increased demand ( 0.005 percent under both alternatives). The price increase is the result of additional control costs and increased demand. Production and consumption quantities also increase in this market ( 0.002 percent under the floor alternative and 0.001 percent under Option 1A) as a result of increased demand.

Additional control costs and higher energy costs associated with the regulation lead to higher goods and services prices in all markets and a decline in output. However, the changes are generally very small. Under the MACT Floor, three markets have price increases greater than or equal to 0.02 percent   Wood Product( NAICS 321), Paper ( NAICS 322), and Textile Mills ( NAICS 313). Under Option 1A, these three markets have price increases greater than or equal to 0.05 percent. The producers in these sectors are expected to face higher per unit control costs relative to other industries. In addition, these industries are also electricity intensive; therefore, costs of production also increase as a result of higher electricity prices.

Although the impacts on price and quantity in the goods and services markets are estimated to be small, one possible effect of modeling market impacts at the two and three digit NAICS code level is that fuel intensive industries within the larger NAICS code definition may be affected more significantly than the average industry for that NAICS code. Thus, the changes in price and 6 6 Table 6 4. Market Level Impacts MACT Floor Percent Change Option 1A Percent Change Sectors/ Markets Price Quantity Price Quantity Energy Markets Petroleum 0.002% 0.000% 0.019%   0.005% Natural gas 0.005% 0.002% 0.005% 0.001% Electricity 0.050%   0.011% 0.108%   0.026% Coal   0.007%   0.010%   0.020%   0.024% NAICS Code SIC Code Description 311 20 ( pt) Food 0.006%   0.002% 0.019%   0.006% 312 20 ( pt); 21 Beverage and Tobacco Products 0.003%   0.004% 0.007%   0.009% 313 22 ( pt) Textile Mills 0.025%   0.021% 0.050%   0.043% 314 22 ( pt) Textile Product Mills 0.000% 0.000% 0.000% 0.000% 315 23 Apparel 0.000%   0.001% 0.001%   0.001% 316 31 Leather and Allied Products 0.002%   0.003% 0.025%   0.030% 321 24 Wood Products 0.041%   0.008% 0.075%   0.015% 322 26 Paper 0.026%   0.028% 0.068%   0.074% 323 27 Printing and Related Support 0.000% 0.000% 0.000%   0.001% 325 28 Chemicals 0.009%   0.013% 0.021%   0.032% 326 30 Plastics and Rubber Products 0.001%   0.002% 0.003%   0.005% 327 32 Nonmetallic Mineral Products 0.003%   0.003% 0.009%   0.008% 331 33 Primary Metals 0.011%   0.009% 0.026%   0.021% 332 34 Fabricated Metal Products 0.003%   0.001% 0.007%   0.001% 333 35 Machinery 0.002%   0.001% 0.005%   0.002% 334 36 ( pt) Computer and Electronic Products 0.001% 0.000% 0.002%   0.001% 335 36 ( pt) Electrical Equipment, Appliances, and Components 0.002%   0.001% 0.009%   0.004%

336 37 Transportation Equipment 0.004%   0.004% 0.007%   0.007% 337 25 Furniture and Related Products 0.008%   0.026% 0.013%   0.044% 339 39 Miscellaneous 0.001% 0.000% 0.003%   0.002% 11 01 08 Agricultural Sector 0.000% 0.000% 0.001%   0.001% 23 15 17 Construction Sector 0.000% 0.000% 0.000% 0.000% 21 10; 14 Other Mining Sector 0.012%   0.004% 0.023%   0.007% 48 40 47 ( pt) Transportation 0.001%   0.001% 0.007%   0.005% 42; 44 45; 49; 51 56; 61 62; 71 72; 81 40 48 ( pt); 50 99 Commercial 0.000% 0.000% 0.001%   0.001%

pt = Part. 9Conversion factors for heat rates were obtained from AEO 2002, Appendix H. These factors vary by year to year; 2010 values are reported in this Appendix.

6 7 quantity should be interpreted as an average for the whole NAICS code, not necessarily for each disaggregated industry within that NAICS code.

6.4 Executive Order 13211 ( Energy Effects)

Executive Order 13211, " Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use" ( 66 Fed. Reg. 28355 [ May 22, 2001]), requires EPA to prepare and submit a Statement of Energy Effects to the Administrator of the Office of Information and Regulatory Affairs, Office of Management and Budget, for certain actions identified as " significant energy actions." Section 4( b) of Executive Order 13211 defines " significant energy actions" as " any action by an agency ( normally published in the Federal Register) that promulgates or is expected to lead to the promulgation of a final rule or regulation, including notices of inquiry, advance notices of proposed rulemaking, and notices of proposed rulemaking:

that is a significant regulatory action under Executive Order 12866 or any successor order, and is likely to have a significant adverse effect on the supply, distribution, or use of energy; or

that is designated by the Administrator of the Office of Information and Regulatory Affairs as a significant energy action."

EPA has provided additional information on the impacts of the rule on affected energy markets below. 9 Energy Price Effects. As described in the market level results section, electricity prices are projected to increase by less than 1 percent. Petroleum and natural gas prices are all projected to increase by less than 0.1 percent. The price of coal is projected to decrease slightly.

Impacts on Electricity Supply, Distribution, and Use. We project the increased compliance costs for the electricity market will result in an annual production decline of approximately 415 million kWh under the MACT floor and 980 million kWh under Option 1A.

Impacts on Petroleum, Natural Gas, and Coal Supply, Distribution, and Use. The model projects decreases in petroleum production/ consumption of approximately 68 barrels per day under the MACT floor and 975 barrels per day under Option 1A. In contrast, natural gas production/ consumption is projected to increase by 1.1 million cubic feet per day under the MACT floor and 600,000 cubic feet per day under Option 1A This is the result of fuel switching in response to relative price changes. Finally, the model also projects less than a 1,000 tons per day decrease in coal production/ consumption under both scenarios in response to reduced output from the electricity sector ( a significant consumer of coal). Based on these results, the Agency concludes that the industrial boiler and process heater NESHAP will not have a significant adverse effect on the supply, distribution, or use of energy.

6.5 Conclusions The decrease in social surplus estimated using the market analysis is $ 862.9 million ($ 1,955.5 million). This estimate is slightly smaller than the estimated baseline engineering costs because the market model accounts for behavioral changes of producers and consumers. Although the rule affects boilers and process heaters used in energy industries, energy producers only incur less than 6 percent of the total social cost of the regulation. This burden is spread across numerous markets because the price of energy increases slightly as a result of the regulation, which increases the cost of production for all markets that use energy as part of their production process.

The remaining share of the social cost is mostly borne by the manufacturing sectors which operate the majority of the boilers and process heaters affected by the regulation. Manufacturing industries bearing the largest social costs include percent   Wood Products ( NAICS 321), Paper ( NAICS 322), and Textile Mills ( NAICS 313). However, the market model predicts that changes in these industries' price and quantity do not exceed 0.02 percent under the floor alternative and 0.05 percent under Option 1A.. 7 8 Because of the minimal changes in price and quantity estimated for most of the affected markets, EPA expects that there would be no discernable impact on international trade. Although an increase in the price of U. S. products relative to those of foreign producers is expected to decrease exports and increase imports, the changes in price due to the industrial boilers and process heaters MACT are generally too small to significantly influence trade patterns. There may also be a small decrease in employment, but because the impact of the regulation is spread across so many industries and the decreases in market quantities are so small, it is unlikely that any particular industry will face a significant decrease in employment.

CHAPTER 7 SMALL BUSINESS IMPACTS This chapter investigates the potential impact the regulation will have on small entities. The Agency has identified 185 small entities that will be affected by the MACT floor alternative for the industrial boilers and process heaters NESHAP. For these entities, the average cost to sales ratio ( CSR) is 0.78 percent and the average annual control cost ( in 1999 dollars) is $ 198,675.

7.1 Results in Brief 7 1 As listed in Table 7 1, 34 of the 185 affected entities will incur annual compliance costs that are greater than or equal to 1 percent of their annual sales or revenues, and 10 of these 34 are expected to incur annual compliance costs of 3 percent or greater of annual sales or revenues. As explained later in this chapter, the Agency has certified that this rule will not impose a significant impact on a substantial number of small entities. This certification is based on the results shown for the MACT floor alternative and on the results of the economic impact analysis shown in Chapter 6. For Option 1A, as listed in Table 7 1, there are almost twice as many small entities affected ( 369), and 148 ( or 40 percent) of these incur annual compliance costs of greater than or equal to 1 percent of their annual sales or revenues, and 45 ( or 12 percent) of the total incur annual compliance costs of 3 percent or greater of annual sales or revenues.

7.2 Background on Small Business Screenings The regulatory costs imposed on domestic producers and government entities to reduce air emissions from boilers and process heaters will have a direct impact on owners of the affected facilities. Firms or individuals that own the facilities with boilers and process heaters are typically business entities that have the capacity to conduct business transactions and make business decisions that affect the facility. The legal and financial responsibility for compliance with a regulatory action ultimately rests with these owners, who must bear the financial consequences of their decisions. Environmental regulations potentially affect all sizes of businesses, but small businesses may have special problems relative to large businesses in complying with such regulations.