2D 3 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 CHAPTER THREE DESCRIPTION OF PROPOSED RULE AND REGULATORY OPTIONS Chapter One provides a summary of the Phase I and Phase II National Pollutant Discharge Elimination System ( NPDES) Storm Water Regulations and the Construction General Permit ( CGP) for the construction industry. This chapter describes the effluent limitation guidelines and standards program ( Section 3.1) , the technology alternatives for the proposed effluent limitation guidelines ( Section 3.2) , and the regulatory options that EPA is proposing for the C& D industry ( Section 3.3) .

3.1 EFFLUENT LIMITATION GUIDELINES AND STANDARDS The Federal Water Pollution Control Act, passed in 1972 ( CWA, 33 U. S. C. § 1251 et seq. ) ,

establishes a comprehensive program to   restore and maintain the chemical, physical, and biological integrity of the Nation' s waters   ( ( § 101( a) ) , often referred to as   fishable, swimmable   status. . The statute was amended in 1987 to include requirements for a comprehensive program to address storm water discharges. Moreover, EPA is authorized under section 301, 304, 306, and 307 of the CWA to establish effluent limitation guidelines and pretreatment standards for industrial dischargers. EPA is authorized to publish the following standards:

# Best Practicable Control Technology Currently Available ( BPT) . Under section 304( b) ( 1) , these rules apply to direct dischargers. BPT limitations are generally based on the average of the best existing performances by plants of various sizes, ages, and unit processes within a point source category or subcategory.

# Best Available Technology Economically Achievable ( BAT) . Under section 304( b) ( 2) , these rules apply to direct discharges of toxic and nonconventional 1 pollutants.

1 Toxic pollutants are listed in Table 1 of U. S. C 1317 Section 307( a) ( 1) and currently include 64 pollutants and their organic and inorganic compounds. This list includes arsenic, DDT, lead, and mercury. Nonconventional pollutants are any pollutants that are not statutorily listed ( not covered by the list of toxic or conventional pollutants) or which are poorly understood by the scientific community.

3 1 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 # Best Conventional Pollutant Control Technology ( BCT) . Under section 304( b) ( 4) , these rules apply to direct discharges of conventional pollutants. 2 BCT limitations are generally established using a two part cost reasonableness test. BCT replaces BAT for control of conventional pollutants.

# Pretreatment Standards for Existing Sources ( PSES) . Under section 307. Analogous to BAT controls, these rules apply to existing indirect dischargers ( i. e. , dischargers to publicly owned treatment works ( POTWs) .

# New Source Performance Standards ( NSPS) . Under section 306( b) , these rules apply to discharges of toxic and nonconventional pollutants and apply to new direct dischargers.

# Pretreatment Standards for New Sources ( PSNS) . Under section 307. Analogous to NSPS controls, these rules apply to new source indirect dischargers ( i. e. , dischargers to publicly owned treatment works ( POTWs) .

Under the proposed effluent limitation guidelines ( ELG) , EPA is proposing BAT, BPT, BCT and NSPS guidelines and standards for erosion and sediment control ( ESC) during the active construction phase.

3.2 REQUIREMENTS UNDER THE EXISTING CONSTRUCTION GENERAL PERMIT The CGP, published in 1992 and revised in 1998, directs NPDES permittees to prepare a storm water pollution prevention plan ( SWPPP) for certain construction activities. The CGP also calls for installation of temporary sediment basins for construction sites with disturbed area of 10 acres or more.

The permit lists a variety of options and goals for other ESCs, but none are required. A description of ESCs, if any, is to be contained in the SWPPP. Options and goals for post construction storm water best management practices ( BMPs) are also contained in the CGP, but none are required. As with ESCs,

selected BMPs, if any, are to be described in the SWPPP.

The C& D industry ELG would build upon and complement the CGP by adding inspection and certification ( I& C) requirements for active construction ESCs. As described below, under one option 2 Conventional pollutants include biochemical oxygen demand ( BOD) , total suspended solids ( TSS) , fecal coliform, pH, and oil and grease.

3 2 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 EPA would add the I& C requirements for sites of one acre or more in size, while under another option the I& C requirements would apply to sites of 5 acres and above. This second option would also codify in the Code of Federal Regulations ( CFR) the requirements found in the CGP. These options are described more fully below.

3.3 SUMMARY OF REGULATORY OPTIONS/ TECHNOLOGY ALTERNATIVES EPA is co proposing two regulatory alternatives, along with a   no regulation   option, , for a total of three regulatory options. EPA has defined the baseline for the proposed rule as full compliance with the current Phase I NPDES storm water regulations and the future Phase II regulations. If any additional costs are incurred by dischargers under the existing storm water regulations the costs will be added to the baseline assumption. Table 3 1 summarizes the regulatory options. Throughout the analysis presented in this report, EPA treats the baseline as   Option 3.   Table 3 1. Summary of Regulatory Options Being Co Proposed by EPA Option Description Regulatory Mechanism Applicability Option 1 Inspection and Certification of Construction Site Erosion and Sediment Controls Amendment to NPDES storm water permitting regulations Sites of 1 acre or more Option 2   Codification   of the Construction General Permit ( CGP) plus Inspection and Certification Requirements Effluent limitation guidelines Sites of 5 acres or more Option 3 No Regulation ( Baseline) N/ A All sites 3 3 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 3.3.1 Option 1 Option 1 would amend 40 CFR Part 122, the section of the CFR covering NPDES permitting,

adding a new paragraph ( t) section to § 122.44 entitled Inspection and Certification for Construction Site Storm Water Discharges . These requirement in this section would include:

( 1) Site log book. The permittee for a point source discharge under § 122.26( ( b) ( 14) ( x) or § 122.26( ( b) ( 15) shall maintain a record of site activities in a site log book. The site log book shall be maintained as follows:

( i) A copy of the site log book shall be maintained on site and be made available to the permitting authority upon request;

( ii) In the site log book, the permittee shall certify, prior to the commencement of construction activities, that any plans required by the permit meet all Federal, State, Tribal and local erosion and sediment control requirements and are available to the permitting authority;

( iii) The permittee shall have a qualified professional ( knowledgeable in the principles and practices of erosion and sediment controls, such as a licensed professional engineer, or other knowledgeable person) conduct an assessment of the site prior to groundbreaking and certify in the log book that the appropriate best management practices ( BMPs) described in plans required by the permit have been adequately designed, sized and installed to ensure overall preparedness of the site for initiation of groundbreaking activities. The permittee shall record the date of initial groundbreaking in the site log book. The permittee shall also certify that any inspection, stabilization and BMP maintenance requirements of the permit have been satisfied within 48 hours of actually meeting such requirements; and ( iv) The permittee shall post at the site, in a publicly accessible location, a summary of the site inspection activities on a monthly basis;

( 2) Site Inspections. The permittee or designated agent of the permittee ( such as a consultant, subcontractor, or third party inspection firm) shall conduct regular inspections of the site and record the results of such inspection in the site log book in accordance with paragraph ( t) ( 1) of this section.

( i) After initial groundbreaking, permittees shall conduct site inspections at least every 14 calendar days and within 24 hours of the end of a storm event of 0.5 inches or greater. These inspections shall be conducted by a qualified professional. During each inspection, the permittee or designated agent shall record the following information:

3 4 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 ( A) Indicate on a site map the extent of all disturbed site areas and drainage pathways. Indicate site areas that are expected to undergo initial disturbance or significant site work within the next 14 days;

( B) Indicate on a site map all areas of the site that have undergone temporary or permanent stabilization;

( C) Indicate all disturbed site areas that have not undergone active site work during the previous 14 days;

( D) Inspect all sediment control practices and note the approximate degree of sediment accumulation as a percentage of the sediment storage volume ( for example 10 percent, 20 percent, 50 percent, etc. ) . Note all sediment control practices in the site log book that have sediment accumulation of 50 percent or more; and ( E) Inspect all erosion and sediment control BMPs and note compliance with any maintenance requirements such as verifying the integrity of barrier or diversion systems ( e. g. , earthen berms or silt fencing) and containment systems ( e. g. , sediment basins and sediment traps) . Identify any evidence of rill or gully erosion occurring on slopes and any loss of stabilizing vegetation or seeding/ mulching. Document in the site log book any excessive deposition of sediment or ponding water along barrier or diversion systems. Note the depth of sediment within containment structures, any erosion near outlet and overflow structures, and verify the ability of rock filters around perforated riser pipes to pass water.

( ii) Prior to filing of the Notice of Termination or the end of permit term, a final site erosion and sediment control inspection shall be conducted by the permittee or designated agent. The inspector shall certify that the site has undergone final stabilization as required by the permit and that all temporary erosion and sediment controls ( such as silt fencing) not needed for long term erosion control have been removed.

Option 1 would also amend § 122.44( i) ( 4) to exclude construction activities from requirements for monitoring of storm water discharges.

Option 1 would apply to sites of one acre or more in size.

3.3.2 Option 2 Option 2 would add a new section to the effluent limitation guidelines section of the CFR, i. e. ,

Part 450   Construction and Development Point Source Category. This section would essentially codify 3 5 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 in the CFR the provisions of the CGP ( see Section 3.2) , and in addition would add the provisions for I& C introduced under Option 1 ( Section 3.3.1) . Option 2 would amend 40 CFR 122( i) ( 3) to specify that discharges from construction activity are instead governed by Part 450.

40 CFR Part 450, Subpart A describes applicability and provides definitions. Subpart B would establish the ESC requirements based on application of BPT, BAT, BCT, and NSPS.

Part 450 would apply to construction and development activities subject to an NPDES permit under the definition of   construction activity   at 40 CFR 122.26( ( b) ( 14) ( x) . Section 450.11 establishes some general definitions for the following terms: BMPs, commencement of construction, final stabilization, groundbeaking, new source, operator, perimeter controls, qualified professional, runoff coefficient, and stabilization.

Section 450.21 would establish effluent limitations reflecting best practicable technology currently available ( BPT) , as follows: 3 Except as provided in 40 CFR 125.30 through 125.32, any existing point source subject to this subpart must achieve the following effluent limitations representing the application of the best practicable control technology currently available ( BPT) . Permittees with operational control over construction plans and specification, including the ability to make modifications to those plans and specifications ( e. g. , developer or owner) , must ensure the project specifications that they develop meet the minimum requirements of a SWPPP required by § 450.21( ( d) .

( a) General Erosion and Sediment Controls. Each SWPPP shall include a description of appropriate controls designed to retain sediment on site to the extent practicable. These general erosion and sediment controls shall be included in the SWPPP developed pursuant to paragraph ( d) of this section. The SWPPP must include a description of interim and permanent stabilization practices for the site, including a schedule of when the practices will be implemented. Stabilization practices may include:

( 1) Establishment of temporary or permanent vegetation;

3 Parts 450.22, 450.23, and 450.24 would establish identical requirements for BAT, BCT, and NSPS, respectively.

3 6 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 ( 2) Mulching, geotextiles, or sod stabilization;

( 3) Vegetative buffer strips;

( 4) Protection of trees and preservation of mature vegetation. ( b) Sediment Controls. The SWPPP must include a description of structural practices to divert flows from exposed soils, store flows, or otherwise limit runoff and the discharge of pollutants from exposed areas of the site to the degree attainable.

( 1) For common drainage locations that serve an area with 10 or more acres disturbed at one time, a temporary ( or permanent) sediment basin that provides storage for a calculated volume of runoff from a 2 year, 24 hour storm from each disturbed acre drained, or equivalent control measures, shall be provided where attainable until final stabilization of the site. Where no such calculation has been performed, a temporary ( or permanent) sediment basin providing 3,600 cubic feet of storage per acre drained, or equivalent control measures, shall be provided where attainable until final stabilization of the site. When computing the number of acres draining into a common location it is not necessary to include flows from off site areas and flows from on site areas that are either undisturbed or have undergone final stabilization where such flows are diverted around both the disturbed area and the sediment basin.

( 2) In determining whether a sediment basin is attainable, the operator may consider factors such as site soils, slope, available area on site, etc. In any event, the operator must consider public safety, especially as it relates to children, as a design factor for the sediment basin, and alternative sediment controls shall be used where site limitations would preclude a safe basin design.

( 3) For portions of the site that drain to a common location and have a total contributing drainage area of less than 10 disturbed acres, the operator should use smaller sediment basins and/ or sediment traps.

( 4) Where neither a sediment basin nor equivalent controls are attainable due to site limitations, silt fences, vegetative buffer strips or equivalent sediment controls are required for all down slope boundaries of the construction area and for those side slope boundaries deemed appropriate as dictated by individual site conditions.

( c) Pollution Prevention Measures. The SWPPP shall include the following pollution prevention measures:

( 1) Litter, construction chemicals, and construction debris exposed to storm water shall be prevented from becoming a pollutant source in storm water discharges ( e. g. , screening outfalls, picked up daily) ; and ( 2) A description of construction and waste materials expected to be stored on site with updates as appropriate, and a description of controls to reduce pollutants 3 7 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 from these materials including storage practices to minimize exposure of the materials to storm water, and spill prevention and response.

( d) Storm Water Pollution Prevention Plan. Operators subject to this Part shall compile Storm Water Pollution Prevention Plans ( SWPPPs) prior to groundbreaking at any construction site. In areas where EPA is not the permit authority, operators may be required to prepare documents that may serve as the functional equivalent of a SWPPP. Such alternate documents will satisfy the requirements for a SWPPP so long as they contain the necessary elements of a SWPPP. A SWPPP shall incorporate the following information:

( 1) A narrative description of the construction activity, including a description of the intended sequence of major activities that disturb soils on the site ( major activities include grubbing, excavating, grading, and utilities and infrastructure installation, or any other activity that disturbs soils for major portions of the site) ;

( 2) A general location map ( e. g. , portion of a city or county map) and a site map. The site map shall include descriptions of the following:

( i) Drainage patterns and approximate slopes anticipated after major grading activities;

( ii) The total area of the site and areas of disturbance;

( iii) Areas that will not be disturbed;

( iv) Locations of major structural and nonstructural controls identified in the SWPPP;

( v) Locations where stabilization practices are expected to occur;

( vi) Locations of off site material, waste, borrow or equipment storage areas;

( vii) Surface waters ( including wetlands) ; and ( viii) Locations where storm water discharges to a surface water;

( 3) A description of available data on soils present at the site;

( 4) A description of BMPs to be used to control pollutants in storm water discharges during construction as described elsewhere in this section;

( 5) A description of the general timing ( or sequence) in relation to the construction schedule when each BMP is to be implemented;

3 8 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 ( 6) An estimate of the pre development and post construction runoff coefficients of the site;

( 7) The name( s) of the receiving water( s) ;

( 8) Delineation of SWPPP implementation responsibilities for each site owner or operator;

( 9) Any existing data that describe the storm water runoff characteristics at the site.

( e) Updating the SWPPP. The operator shall amend the SWPPP and corresponding erosion and sediment control BMPs whenever:

( 1) There is a change in design, construction, or maintenance that has a significant effect on the discharge of pollutants to waters of the United States which has not been addressed in the SWPPP; or ( 2) Inspections or investigations by site operators, local, State, Tribal or Federal officials indicate that the SWPPP is proving ineffective in eliminating or significantly minimizing pollutant discharges.

( f) Site Log Book/ Certification. The operator shall maintain a record of site activities in a site log book, as part of the SWPPP. The site log book shall be maintained as follows:

( 1) A copy of the site log book shall be maintained on site and be made available to the permitting authority upon request;

( 2) In the site log book, the operator shall certify, prior to the commencement of construction activities, that the SWPPP prepared in accordance with paragraph ( d) of this section meets all Federal, State and local erosion and sediment control requirements and is available to the permitting authority;

( 3) The operator shall have a qualified professional conduct an assessment of the site prior to groundbreaking and certify in the log book that the appropriate BMPs and erosion and sediment controls described in the SWPPP and required by paragraphs ( a) , ( b) , ( c) and ( d) of this section have been adequately designed, sized and installed to ensure overall preparedness of the site for initiation of groundbreaking activities. The operator shall record the date of initial groundbreaking in the site log book. The operator shall also certify that the requirements of paragraphs ( g) , ( h) and ( i) of this section have been satisfied within 48 hours of actually meeting such requirements;

( 4) The operator shall post at the site, in a publicly accessible location, a summary of the site inspection activities on a monthly basis.

( g) Site Inspections. The operator or designated agent of the operator ( such as a consultant, subcontractor, or third party inspection firm) shall conduct regular inspections of the site 3 9 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 and record the results of such inspection in the site log book in accordance with paragraph ( f) of this section.

( 1) After initial groundbreaking, operators shall conduct site inspections at least every 14 calendar days and within 24 hours of the end of a storm event of 0.5 inches or greater. These inspections shall be conducted by a qualified professional. During each inspection, the operator or designated agent shall record the following information:

( i) On a site map, indicate the extent of all disturbed site areas and drainage pathways. Indicate site areas that are expected to undergo initial disturbance or significant site work within the next 14 day period; ( ii) Indicate on a site map all areas of the site that have undergone temporary or permanent stabilization;

( iii) Indicate all disturbed site areas that have not undergone active site work during the previous 14 day period;

( iv) Inspect all sediment control practices and note the approximate degree of sediment accumulation as a percentage of the sediment storage volume ( for example 10 percent, 20 percent, 50 percent, etc. ) . Record all sediment control practices in the site log book that have sediment accumulation of 50 percent or more; and ( v) Inspect all erosion and sediment control BMPs and record all maintenance requirements such as verifying the integrity of barrier or diversion systems ( earthen berms or silt fencing) and containment systems ( sediment basins and sediment traps) . Identify any evidence of rill or gully erosion occurring on slopes and any loss of stabilizing vegetation or seeding/ mulching. Document in the site log book any excessive deposition of sediment or ponding water along barrier or diversion systems. Record the depth of sediment within containment structures, any erosion near outlet and overflow structures, and verify the ability of rock filters around perforated riser pipes to pass water.

( 2) Prior to filing of the Notice of Termination or the end of permit term, a final site erosion and sediment control inspection shall be conducted by the operator or designated agent. The inspector shall certify that the site has undergone final stabilization using either vegetative or structural stabilization methods and that all temporary erosion and sediment controls ( such as silt fencing) not needed for long term erosion control have been removed.

( h) Stabilization. The operator shall initiate stabilization measures as soon as practicable in portions of the site where construction activities have temporarily or permanently ceased, but in no case more than 14 days after the construction activity in that portion of the site has temporarily or permanently ceased. This requirement does not apply in the following instances:

3 10 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 ( 1) Where the initiation of stabilization measures by the 14th day after construction activity temporarily or permanently ceased is precluded by snow cover or frozen ground conditions, stabilization measures shall be initiated as soon as practicable;

( 2) Where construction activity on a portion of the site is temporarily ceased, and earth disturbing activities will be resumed within 21 days, temporary stabilization measures need not be initiated on that portion of the site.

( 3) In arid areas ( areas with an average annual rainfall of 0 to 10 inches) , semi arid areas ( areas with an average annual rainfall of 10 to 20 inches) , and areas experiencing droughts where the initiation of stabilization measures by the 14th day after construction activity has temporarily or permanently ceased is precluded by seasonably arid conditions, the operator shall initiate stabilization measures as soon as practicable.

( i) Maintenance. Sediment shall be removed from sediment traps or sediment ponds when design capacity has been reduced by 50 percent.

Option 2 would apply to sites of five acres or more.

3.3.3 Option 3 Option 3 is the   no regulation   option. . Storm water runoff from construction and development activities would continue to be managed in accordance with the requirements of the CGP. There would be no incremental compliance requirements and consequently no incremental compliance costs or benefits.

3 11 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 CHAPTER FOUR ECONOMIC IMPACT ANALYSIS METHODOLOGY 4.1 OVERVIEW OF ECONOMIC IMPACT ANALYSIS METHODOLOGY This chapter presents EPA   s methodology for analyzing the economic impacts of the proposed erosion and sediment control ( ESC) regulations for the construction and development ( C& D) industry.

EPA has employed a number of different methods for assessing the economic impacts of the proposed rule.

These include models that analyze impacts at the level of the individual construction project, the individual firm, national construction markets, and the national economy as a whole. The analysis considers impacts on the firms in the C& D industry who would be complying with the regulations, on those who purchase the output of the C& D industry, and on those who would be responsible for implementing the proposed rule.

The analysis is based upon engineering cost estimates developed by EPA. The engineering costs reflect the costs to comply with requirements related to erosion and sediment controls ( ESCs) employed over a relatively short period ( generally less than one year) during which land is being converted from an undeveloped to a developed state. The engineering costs also include the costs associated with meeting any paperwork requirements triggered by the proposed rule, including any requirements related to the permitting of construction and development projects, and incremental inspection and certification requirements for ESCs.

The outline of the chapter is as follows:

  Section 4.2 presents EPA   s analysis of the impacts of the proposed rule on model C& D projects. Here EPA develops pro forma financial analyses for representative projects and analyzes the impact of the incremental regulatory costs on project viability. The section includes a description of the model projects, model project analysis methodology, data sources, and assumptions used in the model project analysis. The model project analysis results are presented in Chapter Five, Section 5.2.

  Section 4.3 presents EPA   s analysis of the impacts of the proposed rule on model C& D firms. This section uses data on the financial condition of representative firms to examine the impact of the incremental compliance requirements on the model firm   s financial 4 1 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 condition. This section also describes how the model firm analysis is used to evaluate economic achievability and barrier to entry considerations for the proposed rule, and to conduct the firm closure analysis and small entity impact analysis. This section includes a description of the model firms, model firm analysis methodology, data sources, and assumptions used in the model firm analysis. The model firm analysis results, including those from the economic achievability, barrier to entry, closure, and employment loss analyses, are presented in Chapter Five, Sections 5.4 through 5.6.

  Section 4.4 presents EPA   s methodology for estimating the national compliance costs of the proposed rule. These costs are estimated starting with the per acre compliance costs estimated by EPA. The per acre costs are applied to national estimates of the amount of land converted to developed status annually. National compliance cost estimates are presented in Chapter Five, Section 5.3.

  Section 4.5 describes EPA   s partial equilibrium market model analysis. This section considers the impact of the incremental compliance requirements on consumers of the construction industry   s output, in particular the impacts on home buyers and on housing affordability. The section includes a description of the market model methodology, data sources, and assumptions used in the market models. The market modeling results are presented in Chapter Five, Section 5.6.

  Section 4.6 expands the analysis to consider the net impacts of the proposed rule on the national economy. While the compliance costs would reduce output in the construction industry there may be an offsetting increase in spending related to ESCs and inspection and certification. EPA uses input output analysis to trace the implications of these spending shifts on the national economy. The result is an overall estimate of the impact on macroeconomic variables such as output and national employment. The results of the national economic impact analysis are presented in Chapter Five, Section 5.7.

  Section 4.7 considers the impacts on governmental units associated with establishing or modifying permitting programs to reflect the requirements in the proposed rule as well as new or increased costs related to permit processing. The results of the government cost impact analyses are presented in Chapter Five, Section 5.8.

4. 1 . 1 Compliance and Baseline Assumptions In this analysis EPA assumes that the proposed rule would impact markets that have already fully implemented existing regulations related to storm water controls for C& D activities. EPA assumes that all states, tribal lands, and territories comply with the existing regulations or have equivalent programs. These programs are assumed to include all of the requirements affecting C& D activities that were part of the national storm water Phase I and Phase II NPDES storm water regulations. Since the Phase II regulations are not scheduled to be fully implemented until 2003, however, EPA acknowledges that 4 2 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 current market conditions may not fully reflect the baseline that would apply at the time the proposed rule comes into force. Specifically, EPA notes that the baseline market conditions assumed in this analysis ( including baseline financial conditions for affected firms) may not fully reflect the implementation of Phase II NPDES storm water requirements. For this reason, EPA has conducted a supplemental analysis that reflects less than 100 percent implementation of the Phase II NPDES storm water rule in the baseline.

The supplemental baseline analysis is presented in Appendix 5C of this report.

4.1.2 Cost Pass Through Assumptions EPA has incorporated into each of the impact analyses described below specific assumptions about the incidence of the compliance costs. This section describes generally EPA   s conclusions about cost incidence for the proposed regulation and then outlines the specific assumptions made for each impact analysis.

In general, EPA believes that developers and builders faced with an increase in costs due to new ESC requirements would have an incentive to pass on all or some of the increased cost to the project owner. ( This is referred to as cost pass through, or CPT) . The extent to which the costs can be passed through in practice would depend on market conditions. The demand elasticity of the project owner ( i. e. ,

the sensitivity of the purchase decision to incremental changes in price) would be influenced by two main factors:

  The magnitude of the cost increase relative to the overall cost of the project. For example, on a large office project or even a high end single family home, the buyer may put up little resistance if the cost increase is small relative to the overall cost of the project.

  The availability and price of substitutes. If the cost increase affects all suppliers and all substitutes equally, then the project owner is less likely to resist an incremental price increase.

Since the proposed rule would be national in scope and the compliance costs would be similar within a given geographic region ( assuming similar sites) , the compliance costs should affect the buyer   s alternate suppliers roughly equally. This suggests that if the costs are small relative to the total cost of 4 3 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 the project, demand should be relatively inelastic and the builder would be able to pass all or most of the cost increase on to the buyer.

Another factor facilitating cost pass through for builders is that project owners often plan for unexpected cost changes by building contingencies into their budgets. A common mechanism in new residential construction, for example, is for the home buyer to absorb an unexpected cost increase at one stage of construction by reducing costs on a later stage. This might be done, for example, by selecting less expensive flooring material, deferring finishing of a basement, or opting to build a garage at a later date.

This line of reasoning, which suggests demand is generally inelastic, presumes that the   good   the buyer is purchasing is   new construction.   In most markets, however, the owner can also elect to buy from an inventory of existing homes, office or retail space, or industrial facilities available for sale, or to rent from a corresponding inventory of rental properties. To the extent that existing construction and rental property serves as a perfect or even partial substitute for new construction, the buyer   s demand elasticity would also be influenced by conditions in the existing construction and rental markets.

Existing homes and existing office, retail or industrial space would not be affected by the proposed regulation. Cost increases that differentially affect new construction may cause some buyers to choose existing construction over new, i. e. , they could elect to buy or rent rather than build. The strength of demand for new relative to existing construction depends on the relative availability, suitability, and price of each type of construction. Buyers choosing new over existing construction often do so for reasons related to location, the ability to match their specific needs, expected length of tenure, and greater certainty about a structure   s condition and future maintenance requirements. Demand for new construction is also highly influenced by the availability, quality, and age of existing construction. In geographic areas or market segments where the existing inventory is weak or unsuitable, demand for new construction would be stronger.

Evidence from the literature suggests that in residential construction, regulatory related costs are usually passed on to consumers ( e. g. , Luger and Temkin 2000) , and this general observation was echoed during EPA   s focus group sessions with members of NAHB. Industry literature points out that in the recent past, a variety of market forces have shifted the new construction market towards larger, more 4 4 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 expensive homes ( NAHB 2001a) . Other things equal, demand in the higher end of the housing market tends to be more inelastic. Efforts to model the housing sector have shown that new construction is more affected by changes in household formation and income than marginal changes in price ( Hirsch 1994) .

Given this evidence, EPA believes overall that demand in the single family housing sector is relatively inelastic.

In the other sectors modeled ( multifamily housing, commercial, industrial) , EPA believes demand to be relatively inelastic as well. In the non residential sectors, interest rates, regional economic performance and outlook, and changing technological needs are important drivers of building demand.

As shown in the subsequent chapter, the change in costs relative to total project costs in these markets are relatively small and unlikely to influence the purchase decision, given the greater significance of these other factors.

EPA notes that under certain conditions developers might also attempt to pass regulatory costs back to land owners. In a depressed market, builders may argue successfully that a regulatory cost increase would make a particular project unprofitable unless the land costs can be reduced. For example,

if the land owner is convinced that a residential subdivision project would not go ahead because home buyers would not absorb an unexpected increase in sales price, they may be willing to accept a lower price per acre for raw land. The ability of developers to pass such costs back would likely depend on the land owner   s experience in land development projects, their knowledge of the local real estate market,

and in particular their understanding of the regulation and its likely cost. While some evidence of cost pass back to land owners exists for fixed and readily identifiable regulatory costs, such as development impact fees ( Luger and Temkin 2000) , it is unclear whether a builder   s claim that costs would be higher due to the types of requirements imposed by the proposed rule would induce land owners to make concessions.

In the sections below, EPA has made differing assumptions concerning whether compliance costs are passed through to buyers, and to what extent. In the model project analyses in Section 4.2, for example, EPA analyzes results under the extreme conditions of zero and 100 percent CPT. This enables EPA to examine the impacts under worst case assumptions with respect to builders ( zero CPT) , as well as to owners ( 100 percent CPT) .

4 5 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 In other parts of the impact analysis EPA introduces more realistic assumptions about actual market conditions. For example, it is generally thought that the long run supply of new construction is almost perfectly elastic, as resources can shift easily into the industry. When empirical elasticity estimates are used to estimate actual cost pass through, the combination of inelastic demand and highly elastic supply results in relatively high cost pass through rates, on the order of 85 percent. In the model firm and closure analysis ( Section 4.3) , EPA analyzes the impacts under conditions of zero CPT ( worst

case) as well as under the most realistic estimates of actual CPT. In the market models ( Sections 4.5 and 4.6) EPA uses only the estimates of actual CPT.

4.1.3 Operation and Maintenance Costs In order to remain effective all of the ESCs should be maintained. The engineering costs for ESCs include costs for operating and maintaining the controls. The controls used during the active phase of construction are assumed to be in place for one year and therefore should be maintained throughout the period.

4.1.4 Impacts Associated With NSPS Under Option 2, EPA is proposing to define a   new source   under Part 450 as: :   any source of storm water discharge associated with construction activity that results in the disturbance of at least five acres total land area that itself will produce an industrial source from which there may be a discharge of pollutants regulated by some other new source performance standard elsewhere under subchapter N.   1 This definition would mean that the land disturbing activity associated with constructing a particular facility would not itself constitute a " new source" unless the results of that construction would yield a " new source" regulated by other new source performance standards. For example, construction activity that is intended to build a new pharmaceutical plant covered by 40 CFR 439.15 would be subject to new source performance standards under § 450.24. . At the same time, EPA is seeking comment on whether 1 All new source performance standards promulgated by EPA for categories of point sources are codified in subchapter N.

4 6 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 no sources regulated under Option 2 should be deemed   new sources   on the grounds that construction activity itself is outside the scope of those activities intended to be covered by Section 306 of the Clean Water Act ( CWA) . 2 Under the proposed definition, EPA believes that the NSPS standards could trigger a National Environmental Policy Act ( NEPA) review process for those C& D activities permitted by EPA. To assess the potential impact of such a result, EPA examined NPDES construction permitting data for 19 states fully or partially administered by EPA. In 2000, the number of permits administered by EPA was 8,563.

EPA believes, however, that by the time the proposed C& D rule is finalized the states of Florida, Maine,

and Texas ( currently fully administered by EPA) will have assumed permitting authority for construction activities. In 2000, the number of permits administered by EPA excluding these three states was 1,454.

The NPDES permitting data does not include sufficient detail to indicate the number of sources that could be new sources covered by CWA Section 306. EPA notes, however, that in a 1999 study of 14 jurisdictions, slightly under one percent of construction permits were for industrial facilities ( EPA, 1999;

see Table 4 15) . Based on this, EPA believes that the number of construction permits for new sources ( regulated under Subchapter N) that would be administered by EPA is likely to be small. At this time,

therefore, EPA has not estimated any potential costs for NEPA review as part of this economic analysis.

4.2 IMPACTS ON MODEL PROJECTS EPA has analyzed the impacts of the proposed rule by developing financial models of representative C& D projects. These models evaluate whether the additional costs of complying with the proposed regulation would make the model project unprofitable and vulnerable to abandonment or closure. In the absence of an industry survey, the economic models are based on EPA   s best available data and assumptions concerning construction project characteristics, and are designed to depict as accurately as possible the change in cash flow resulting from compliance with the proposed rule for typical projects, representative of the type required to comply with the proposed rule. The models developed reflect the range of C& D projects typically undertaken by industry participants.

2 " The term ' new source' means any source, the construction of which is commenced . . . " 33 U. S. C. sec. 1316( a) ( 2) ( emphasis added) .

4 7 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 4.2.1 Description of Model Project Approach EPA selected the model project types by analyzing data on the output of the C& D industry. The industry output reflects both the diversity of the industry itself and the diversity of the U. S. economy overall. To illustrate this diversity, EPA notes that the Census of Construction assigns construction projects to one of 17 building and 32 nonbuilding construction categories ( see Appendix 2A, Table 2A 3) .

In terms of economic value, building construction projects accounted for $ 371.4 billion ( 97.3 percent of total construction revenues) in 1997, while nonbuilding construction projects accounted for only $ 5.9 billion ( 1.5 percent) . 3 The largest single category of construction activity, accounting for $ 150.5 billion ( 39.4 percent of the total) , was single family home construction. This was followed by office buildings at $ 40.3 billion ( 10.6 percent of the total) , all other commercial buildings at $ 36.5 billion ( 9.6 percent of the total) ,

manufacturing and light industrial buildings at $ 26.2 billion ( 6.8 percent of the total) , educational buildings at $ 25.1 billion ( 6.6 percent of the total) , and multifamily housing at $ 19.6 billion ( 5.1 percent of the total) . Based on this review, EPA developed models for four types of development projects that reflect the range of projects undertaken by the industry and that would fall within the ambit of the proposed rule.

These included:

  A residential development of single family homes   A residential development of multifamily housing units   A commercial development ( enclosed shopping center)

  An industrial development ( industrial park)

Furthermore, for each class of project , EPA has developed models that correspond to a range of project sizes. In each case, there are versions of the model for projects of 1, 3, 7.5, 25, 70, and 200 acres.

The combination of four project types and six project size classes results in a total of 24 model projects.

EPA   s models for these projects assess their vulnerability to shutdown or closure by predicting the cash flow changes that would result from the incremental costs that project developers would incur in 3 Another $ 4.2 billion ( 1.1 percent of the total) was not specified by kind.

4 8 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 complying with the proposed rule. The models establish the baseline financial conditions for each representative project and assess the significance of the change in cash flow that results from the incremental compliance costs. The model project characteristics are based on best available data and reasonable assumptions about development activities and project financing.

4.2.2 Treatment of Nonbuilding Construction Projects As noted above, an estimated $ 5.9 billion in nonbuilding construction is put in place each year.

This total includes highways, roads and streets ( $ 1.6 billion) ; sewage and water treatment facilities ( $ 1.7 billion) ; bridges, tunnels, and elevated highways ( $ 587 million) ; sewers and water mains ( $ 211 million) ;

power and communication lines and towers ( $ 160 million) ; and private driveways and parking areas ( $ 100 million) . While considerable in absolute value, such nonbuilding construction activity represents less than two percent of the total value of construction completed. Estimates of the land area disturbed as a result of nonbuilding construction activity are not available.

EPA has not developed engineering costs applicable to nonbuilding construction projects, due to the diversity of the activities covered under this category and the relatively small share of overall construction activity it accounts for. 4 By way of analysis, EPA has developed a reduced form model project for highway construction and analyzed the likely magnitude of the costs and impacts using the highway model. This analysis is presented in Section 4.2.7.

4.2.3 Description of Model Projects To develop the model projects, EPA focused first on the single family residential model project.

As noted above, single family residential construction represents the highest value category of construction, and information about the construction and development process for single family homes is 4 The national costs of the proposed rule, however, do account for the costs borne for these types of projects. See Section 4.4.

4 9 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 readily available. 5 EPA was able to develop a relatively detailed model for the single family development and then adjusted the model parameters as necessary to reflect differences in the other project categories. In general, EPA believes that projects in the other categories follow a roughly similar development path, and has thus used a similar general structure for all of the models.

Since many of the data elements and modeling assumptions are based on the single family residential model, this model is discussed in detail below. Many of the assumptions and data elements defined for this model were applied directly or modified only slightly for use in the other models. The discussion of the other three project types focuses primarily on those assumptions or methods that differ from those employed in the single family residential model.

<IP_ADDRESS> Residential Single family Development The model single family residential project or site is an undeveloped parcel zoned for single

family residential housing. The number of housing units built would depend on the size of the model project. 6 The location of the site is unspecified, and for this reason EPA has used national level data wherever possible. In this case, the site is assumed to be controlled by a developer builder ( sometimes referred to in the industry as merchant builders or operative builders) . The developer builder is responsible for all aspects of the project, from land acquisition through permitting, subdivision of the parcel, installation of any ESCs, and construction and marketing of all completed housing units. EPA recognizes that there are many variations on how a particular site may be developed, but believes this model project to be representative of a large number of projects actually undertaken each year in the U. S. 7 5 For example, EPA was able to obtain input to the single family residential model from representatives of the National Association of Home Builders ( NAHB) , a prominent C& D industry association. Input from NAHB assisted EPA in identifying cost elements associated with each stage of project development.

6 Model projects were developed for sites of 1, 3, 7.5, 25, 70, and 200 acres.

7 Other common scenarios involve the developer selling all or some of the finished lots to builders. The developer may or may not retain lots in the development to complete and sell. See Figure 2 4, for example.

4 10 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 The starting point for the project is the acquisition of the parcel, which is assumed to be purchased or optioned from another land owner. 8 The development and construction process, as modeled, is assumed to proceed through three phases, characterized as follows:

  Land acquisition   The developer builder puts together the necessary financing to purchase the parcel. When lenders are involved, they may require certain documentation, such as financial statements, tax returns, appraisals, proof of the developer   s ability to obtain necessary zoning, evaluations of project location, assessments of the capacity of existing infrastructure, letters of intent from city/ town to install infrastructure, environmental approvals, etc. To satisfy these factors, the developer may incur costs associated with compiling this data.

  Land development   The developer builder obtains all necessary site approvals and prepares the site for the construction phase of the project. Costs incurred during this stage are divided among soft costs for architectural and engineering services, legal work, permits, fees, and testing, and hard costs , such as land clearing, installing utilities and roads, and preparing foundations or pads. The result of this phase is a legally subdivided parcel with finished lots ready for construction.

  Construction   The developer builder undertakes the actual construction of the housing units. A substantial portion of this work may be subcontracted out to specialty subcontractors ( foundation, framing, roofing, plumbing, electrical, painting, etc. ) . Marketing of the development generally begins prior to the start of this phase, hence the developer builder may also incur some marketing costs at this time. Housing units may come under sales agreement at any time prior to, during, or after completion of construction.

While the length of each phase and the overall length of the project may vary considerably, EPA assumes, for modeling purposes, that the time elapsed from acquisition of the parcel through development and construction totals 36 months. Focus groups with NAHB in Dallas provided estimates that ranged from 13 to 63 months. While acknowledging there will be wide variation in the duration of each phase,

EPA further assumes that each phase   land acquisition, development, and construction   takes 12 months.

EPA presently lacks detailed data on the exact timing of ESC installation during project development. EPA assumes that ESCs installed to control runoff during the active phase of construction 8 Options involve payments from the developer to a land owner to secure the rights to develop the land for a specified period of time, usually while a more complete assessment of project viability is undertaken.

4 11 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 are put in place early in the development phase and are maintained throughout the construction phase.

Thus, the capital costs for such ESCs would generally be incurred early in the project, and the structures would be maintained in place for the duration of the project. The costs for removing the ESCs would be incurred at project completion. 9 These general assumptions aside, in this analysis EPA has used the simplifying assumption that the costs for all ESCs are incurred at the beginning of the project. EPA acknowledges that capital costs would actually be incurred some time after the start of the project, and that as a result, the costs would be discounted back to their present value. In making this assumption,

EPA is thus overstating the magnitude of the true costs incurred, since costs incurred in the future would have a lower present value.

EPA understands that land development projects involve significant cash outflows early on to finance land acquisition, development, and construction, with revenues generally received only after completed houses are sold to buyers. For this reason, EPA assumes that the integrated developer builder assumed here would be motivated to have several projects underway at one time. Cash inflows from the sale of completed units in one development can offset cash outflows associated with the earlier stages of development on another project. For simplicity, EPA assumes that the developer builder involved in the model project has three projects underway so that in any given year the developer builder incurs all of the costs   and earns all of the revenues   associated with completing the land acquisition, development,

and construction phases of a project, even though these may occur on different projects.

Additional assumptions and sources for data used in the model project analysis are presented below. The model project is developed using assumptions about the types and magnitude of costs incurred during various phases of the project, the sources for these funds ( i. e. , the amounts borrowed versus the amounts provided from the developer builder   s equity) , and the expected profit margins earned by the developer builder from each phase of the project. EPA is seeking comments on these assumptions as well as any additional data that may enable the Agency to more accurately model such impacts at the project level.

9 In practice, some ESCs installed to control runoff during the construction phase that are then converted to permanent BMPs to control post construction flows. These structures would not need to be removed.

4 12 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Assumptions regarding the various cost elements incurred during each phase of the residential single family development are described in detail in Section 4.2.5.

<IP_ADDRESS> Residential Multifamily Development The model multifamily residential development is an apartment building or complex. The project is assumed to be developed in a similar fashion to the single family model development described above: a single developer builder is responsible for all site acquisition, site preparation, construction, and marketing of the project; the project timeline is similar, i. e. , three years from start to finish; and the project proceeds through the same project phases. Similarly, the developer builder is assumed to have several projects underway to help balance cash flows. This assumption makes it possible to examine the impacts of a three year project on a single year   s cashflow for the affected business. Data sources and inputs specific to the model multifamily development are discussed in Section 4.2.5.

<IP_ADDRESS> Commercial Development The commercial development is assumed to be an enclosed retail shopping or office area.

Depending on the size of the model project, it could range from a small stand alone retail outlet to a large, enclosed mall or office complex. As with the residential projects, a single developer builder is assumed to be responsible for all site acquisition, site preparation, construction, and marketing of the project. The project timeline is assumed to be the same as for the residential projects, i. e. , three years from start to finish, and to proceed through the same project phases. Similarly, the developer builder is assumed to have several projects underway to help balance cash flows. This assumption makes it possible to examine the impacts of a three year project on a single year   s cashflow for the affected business. Again, the particular data sources used and inputs to this model project are discussed further in Section 4.2.5.

4 13 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 <IP_ADDRESS> Industrial Development The industrial development is assumed to be an industrial park or a stand alone manufacturing facility. As with the residential and commercial projects, a single developer builder is assumed to be responsible for all site acquisition, site preparation, construction, and marketing of the project. The project timeline is assumed to be the same as for the residential and commercial projects, i. e. , three years from start to finish, and to proceed through the same project phases. Similarly, the developer builder is assumed to have several projects underway to help balance cash flows. This assumption makes it possible to examine the impacts of a three year project on a single year   s cashflow for the affected business. A detailed discussion of data sources and inputs, which are similar to those used for the model commercial development, follows in Section 4.2.5.

4.2.4 Cost Pass Through Assumptions For modeling purposes, EPA has analyzed the impacts of the regulatory options on each model development project under two extreme alternatives: 100 percent cost pass through ( CPT) and zero percent CPT. As explained in Section 4.2, this allows EPA to show the impacts under worst case conditions for builders ( zero percent CPT) and worst case conditions for owners ( 100 percent CPT) .

Under the 100 percent CPT scenario, a fixed percentage is assumed for the developer builder   s profit margin and the model calculates the final sales price that each buyer would be asked to pay after the compliance costs have been passed through. Under the zero CPT scenario, a fixed percentage is assumed for the developer builder   s profit under baseline conditions and the change in profit is calculated under each regulatory option, with the sale price of each housing unit remaining the same. Section 4.2.5 contains further details on the assumed profit levels and other inputs.

4.2.5 Inputs to the Model Project Analysis As noted above, the representative projects take place in three phases: land acquisition, site development, and construction. The process of obtaining options on land to be developed ( a common but not universal step that occurs in the very early stages of development) , has been combined with the 4 14 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002   land acquisition   activities for simplicity. . Assumptions regarding the various costs that are incurred during each phase of the project are summarized in Table 4 1 below.

Table 4 1. Costs Incurred at Various Stages of a Residential Construction Project Project Phase Cost Elements Land Acquisition   Raw land ( purchase or option)   Interest on land acquisition loan   Opportunity cost of capital Development   Engineering   Due diligence   Land development   Storm water controls   Contingency   Impact fees   Interest on development loan   Opportunity cost of capital   Overhead Building Construction   Lot cost ( if sold to a builder; includes land acquisition and development costs plus profit to the developer)   Construction cost   Builder overhead   Interest on construction loan   Opportunity cost of capital   Real estate and marketing fees Overall, EPA has used more than two dozen different modeling parameters, although not all project types encompass all of these parameters. Since the project location is not specified, national estimates are used where possible. Participants in the NAHB focus group meetings in Chicago assisted EPA with identifying ranges for a number of cost elements for the hypothetical residential construction project, developing estimates for raw land costs, engineering costs, and construction costs, among others.

Some of the estimates proposed during the NAHB Chicago meetings are used in the model project,

especially where actual national level data has not yet been identified, and may reflect market conditions in that part of the country. Table 4 2 presents the assumptions used in the single family residential model, along with the data source( s) used. Appendix 4A contains a similar table outlining the data parameters and sources for all four model project types. A more detailed discussion of selected parameters and data sources used for the project models is contained in Appendix 4B.

4 15 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4 2. Model Parameters and Data Sources Model Parameter Source 1, 3, 7.5, 25, 70, and 200 size of parcel, in acres EPA assumption $ 40,000 cost of raw land, per acre Estimate from NAHB Chicago focus groups, based on experience of the Chicago area participants. See Appendix 4B for further discussion.

0.33 size of lot, in acres Census Report C25 ( Characteristics of New Housing, 1999) reports a mean lot size for new single family homes sold of 12,910 square feet, which represents a density of close to 3 lots per acre ( evenly distributed with 1/ 3 acre lots) . ( The median lot size is 8,750 square feet, which implies a density of almost 5 lots per acre. )

2.67 approximate density ( number of lots per acre) Calculated based on impervious surface ratios from   Chesapeake Bay Watershed Impervious Cover Results by Land Use Polygons,   to account for impervious surface area. Total number of lots ( density x site size) is rounded to nearest whole number.

$ 2,500 due diligence costs, per acre Based on $ 100,000 in total due diligence costs for a hypothetical 40 acre development discussed by the NAHB Chicago focus group participants. Participants considered the costs associated with all necessary environmental and engineering assessments, usually done prior to land acquisition. During these assessments the developer works to identify any potential future problems or liabilities. See Appendix 4B for further discussion.

$ 25,000 land development costs, per lot Estimate from NAHB Chicago focus groups. This figure includes any construction activities related to land development ( e. g. , infrastructure costs) .

6% engineering costs, as percent of land development costs Estimate from NAHB Chicago focus groups.

10% overhead costs, as percent of development costs Estimate from NAHB Chicago focus groups.

10% contingency, as percent of land development costs ( before impact fees) Estimate from NAHB Chicago focus groups.

$ 15,000 impact fees, per lot Estimate from NAHB Chicago focus groups. See Appendix 4B for further discussion.

7% real estate and marketing fees, as percent of house sales price Estimate from NAHB Chicago focus groups.

2,310 average square footage of new house From Census Report C25, the average size of new single family homes sold in 1999 and conventionally financed was 2,310 square feet $ 53.80 cost of house construction, per square foot From NAHB   s website, construction costs for a generic single family house are $ 124,276. $ 124,276 ÷ 2,310 sq. . ft. = $ 53.80 per sq. ft. ( NAHB 2001b) . See Appendix 4B for further discussion.

65% percent of total land cost that a developer can finance for land acquisition Loan to value ratio as written in the Real Estate Lending Rules. See Appendix 4B for further discussion.

4 16 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4 2. Model Parameters and Data Sources Model Parameter Source 75% percent of total development costs that a developer can finance for this stage Loan to value ratio as written in the Real Estate Lending Rules. See Appendix 4B for further discussion.

80% percent of total building construction cost that a builder can finance Loan to value ratio as written in the Real Estate Lending Rules. See Appendix 4B for further discussion.

7.5% loan interest rate for builder/ developer EPA estimate.

3 term of land acquisition loan, years EPA assumption. Assumes that the land acquisition loan is paid off over the life of the project, which in this case is 3 years.

1 term of development loan, years EPA assumption. Assumes that the land development loan term is equal to the length of the development phase of the project, which in this case is 1 year.

1 term of construction loan, years EPA assumption. Assumes that the construction loan term is equal to the length of the construction phase of the project, which in this case is 1 year.

10% assumed baseline profit on land development NAHB Chicago focus group estimated 12 14 percent; 10 percent is an EPA assumption. See Appendix 4B for further discussion.

10% assumed baseline pre tax profit on construction NAHB Chicago focus groups estimated 8 to 12 percent pre tax at time of sale. R. S. Means also uses 10 percent as a profit assumption in their Cost Data series.

4.2.6 Model Project Analysis Approach The model project defines the baseline financial performance of the residential subdivision project prior to the promulgation of the proposed rule. The baseline case is assumed to incorporate the costs of full compliance with the existing Phase I and future Phase II NPDES storm water regulations.

The model is set up to then assess the incremental impact of additional requirements imposed under the proposed effluent guidelines.

<IP_ADDRESS> Baseline Model Project Performance Table 4 3 presents the model project analysis under baseline conditions, that is prior to adding in compliance costs associated with the proposed regulatory requirements. The model estimates the final 4 17 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 sales price per housing unit using the assumptions discussed above. The model incorporates built in targets for profit margins on both the development and construction portions of the project, as well as other assumptions that affect the target sales price for each unit. As seen, using the assumptions discussed here, the calculated sales price for each unit is $ 283,093. EPA notes that this is higher than the national mean sales price for conventionally financed new single family housing units, which was $ 234,900 in 2000 ( FHFB 2001) . EPA attributes the difference to assumptions in the model that may reflect higher priced housing markets. Despite this likely bias, EPA believes that the model is sufficiently well calibrated to allow comparison of the impacts of alternative storm water control costs on the model project financials.

It is important to note that while the model recognizes that projects are developed over time, the model does not fully account for the time value of money. Assumptions have been made regarding the duration of each stage of development in order to determine the period for any loans taken on by the developer, i. e. , three years for land acquisition loan, one year for development loan, one year for construction loan. These assumptions influence the debt carrying costs incurred by the developer. What the model does not account for, however, is the fact that some costs are incurred in years two and three ( e. g. , construction costs are incurred three years out) and therefore should be discounted back to the base year, which is the year the project starts. The discount factors for costs incurred two and three years in the future are 0.873 and 0.816, respectively, assuming a seven percent discount rate. This means that any adjustments made to reflect the time value of money would reduce the overall project costs, but to a fairly limited degree. 10 <IP_ADDRESS> Results of Model Project Analysis The model incorporates the costs of incremental regulatory costs via the shaded line item shown in Table 4 3. These engineering cost estimates are specific to both the type of project and project size.

As these costs are added to the other costs incurred during development, the financing requirements in the development stage also increase. Table 4 4 shows the baseline project data and illustrates how the 10 These comments apply to the baseline costs incurred for project development, but do not apply to the incremental regulatory costs. EPA has discounted all regulatory costs that wold be incurred in the future back to the baseline year, in accordance with EPA and OMB guidance for conducting regulatory impact analysis.

4 18 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 project financials change in response to the regulatory costs associated with Option 1 under the proposed regulation.

As seen, the incremental controls for the option shown in the example, $ 483, would raise the calculated sales price on each housing unit from $ 283,093 to $ 283,137, a difference of $ 44. This represents 0.02 percent of the baseline sales price. When the $ 44 per lot cost passed on to the buyer is compared with the contractor   s per lot cost of controls ( i. e. , $ 483 ÷ 20 lots = = $ 24.15) , the calculated cost   multiplier   for this model project is in the range of 1.814. . The cost multiplier is determined by taking the calculated increase in house sales price ( over baseline) and dividing it by the actual per lot cost of storm water controls incurred by the builder. In this example, all costs are passed on to the buyer ( 100 percent CPT) . In Chapter Five, EPA presents the results for all combinations or regulatory options under both the 100 percent and zero CPT assumption. Under the zero CPT assumption, the builder would absorb the $ 24.15 in compliance costs on each lot. The impact would be reflected in a decrease in the builder profit, and the sales price of the housing unit would remain the same.

4 19 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4 3. Baseline Economic Model of Hypothetical 7.5 Acre Residential Development Project Cost Element Value Land Acquisition ( 7.5 acre parcel) Raw land Interest on land acquisition Opportunity cost of capital Land acquisition costs $ 300,000 $ 29,955 $ 16,129 $ 346,084 Land development ( 7.5 acre parcel)

Engineering Due diligence Land development ESC engineering costs Contingency Impact fees Interest on development loan Opportunity cost of capital Overhead [ a ]

Land development costs $ 30,000 $ 18,750 $ 500,000 $ 0 $ 50,000 $ 300,000 $ 50,555 $ 16,852 $ 78,079 $ 1,044,235 Land acquisition + land development costs Profit on land acquisition and development Total   Land acquisition and development $ 1,390,319 $ 154,480 $ 1,544,799 Construction Costs ( per lot)

Finished lot cost Construction cost Interest on construction loan Opportunity cost of capital Builder overhead [ a ]

Total costs to builder Marketing fees Profit on construction costs House sales price ( calculated) $ 77,240 $ 124,276 $ 12,091 $ 3,023 $ 18,338 $ 234,968 $ 19,817 $ 28,309 $ 283,093 Incremental Regulatory Impacts Change in sales price per lot Costs as percent of sales price Multiplier $ 0 0.00%

0.00 [ a ] Overhead in both the development and construction stages is calculated as total overhead ( ( based on 10 percent of development or construction costs) less the opportunity cost of capital. This was done to avoid double counting the opportunity cost of capital. Source: EPA estimates. See also Table 4 2 for model parameters and data sources.

4 20 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4 4. Illustration of Impact of Incremental Storm Water Control Requirements on Model Project Under Proposed Rule Option 1   100 Percent Cost Pass Through Scenario Project Cost Element Baseline Option 1 Land Acquisition ( 7.5 acre parcel)

Raw land Interest on land acquisition Opportunity cost of capital Land acquisition costs $ 300,000 $ 29,955 $ 16,129 $ 346,084 $ 300,000 $ 29,955 $ 16,129 $ 346,084 Land Development ( 7.5 acre parcel)

Engineering Due diligence Land development ESC engineering costs Contingency Impact fees Interest on development loan Opportunity cost of capital Overhead [ a ]

Land development costs $ 30,000 $ 18,750 $ 500,000 $ 0 $ 50,000 $ 300,000 $ 50,555 $ 16,852 $ 78,079 $ 1,044,235 $ 30,000 $ 18,750 $ 500,000 $ 483 $ 50,000 $ 300,000 $ 50,582 $ 16,861 $ 78,121 $ 1,044,796 Land acquisition + land development costs Profit on land acquisition and development Total   Land acquisition and development $ 1,390,319 $ 154,480 $ 1,544,799 $ 1,390,880 $ 154,542 $ 1,545,422 Construction Costs ( per lot) Finished lot cost Construction cost Interest on construction loan Opportunity cost of capital Builder overhead [ a ]

Total costs to builder Marketing fees Profit House sales price ( calculated) $ 77,240 $ 124,276 $ 12,091 $ 3,023 $ 18,338 $ 234,968 $ 19,817 $ 28,309 $ 283,093 $ 77,271 $ 124,276 $ 12,093 $ 3,023 $ 18,341 $ 235,004 $ 19,820 $ 28,314 $ 283,137 Incremental Regulatory Impacts Change in sales price per lot Costs per lot as % of baseline sales price Multiplier [ b ] $ 0 0.00%

0.000 $ 44 0.02%

1.814 [ a ] Overhead in both the development and construction stages is total overhead ( ( based on 10 percent of development or construction costs) minus the opportunity cost of capital. This was done to avoid double counting of the opportunity cost. [ b ] [ Incremental regulatory costs per lot x number of lots ] ÷ [ engineering costs ] Source: EPA estimates. See also Table 4 2 for model parameters and data sources.

4 21 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 4.2.7 Model Nonbuilding Project Analysis As noted in Section 4.2.2, nonbuilding construction such as roads, highways, bridges, etc. s a sizeable activity but overall represents less than two percent of the total value of construction completed each year. To assess the potential impacts of the proposed rule on such activities EPA has developed a model highway construction project and used this model to assess the proposed rule   s costs and impacts.

EPA believes the model captures and reflects the likely magnitude and significance of the impacts of the proposed rule on the nonbuilding construction sector overall.

From the highway engineering literature, EPA assumed that the typical four lane interstate roadway is configured as follows: two travel lanes of 24 feet each, one 20 foot median between the travel lanes, and 10 foot buffer on each side of the highway ( Wright, 1996) . EPA assumed that the combined width of the road surface, median, and buffers, 88 feet, represents the typical disturbed area for new highway construction. One mile of new highway would therefore represent 10.67 acres in disturbed area. 11 To develop representative baseline costs for the model highway project, EPA examined data from the Federal Highway Administration   s ( FHWA   s) Highway Statistics publication. Table FA 10 (   Obligation of Federal Aid Highway Funds for Highway Improvements   ) of the Highway Statistics series shows the number of miles, federal funds obligated, and total cost for approved projects in a number of highway improvement categories and roadway functional classifications. Improvement categories include new construction, relocation, widening, and bridge work, among others. Roadway functional classifications include arterials, collectors, and local roads, both rural and urban. Arterials are further divided into interstate, other freeways and expressways, other principal arterials, and minor arterials.

EPA aggregated the mileage and cost for the following improvement categories: new construction, relocation, reconstruction with added capacity, and major widening. EPA further used only data for urban interstates and other freeways and expressways, since other functional classifications may 11 The disturbed area is 88 feet or 0.0167 miles wide ( 88 ÷ 5,280 feet) ) . One mile of roadway therefore disturbs 0.0167 square miles, or 10.67 acres ( 0.0167 x 640 acres/ square mile) .

4 22 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 include projects that do not closely match the model project characteristics. Since highway and road funding can fluctuate from year to year, EPA estimated the average miles and average cost over the period 1995 2000. Table 4 5 shows these data, with all dollar values expressed in 1997 dollars. 12 Once all dollar amounts were expressed in constant year dollars, EPA summed the number of miles, federal funds, and total costs across the two functional classifications and four improvement types to generate an overall estimate of total cost and miles affected. The total cost was then divided by the miles affected to generate a weighted average cost per mile over all relevant improvement types and functional classifications. Table 4 5 shows the weighted average cost is $ 5.4 million per mile.

Some caveats should be noted about the data from the   Highway Statistics   series, , and as used in EPA   s impact model. First, the dollar amounts used represent obligated funds, rather than actual finished project cost. Therefore, the final project cost ( as well as the actual payment to private sector contractors carrying out the work) may be different than the costs reported here ( Benedict 2002) . 13 Second, the costs reported in Table FA 10 of   Highway Statistics   are for multi  year projects ( Benedict 2002) . This does not present a serious problem for the analysis because the costs provide consistent estimates of project

level costs and affected miles with which to calculate a project level cost per mile. The fact that project completion may span multiple years is not particularly relevant for this analysis. These caveats aside,

this is the most complete and well documented set of data available on the cost for highway construction projects nationwide. 14 The results of this analysis are presented in Sections 5.2 and 5.4.

12 Values were converted to 1997 equivalents using data from Table PT 1 of the Highway Statistics publication,   Price Trends for Federal Aid Highway Construction   ( ( FHWA, 2001a) .

13 Actual costs may be higher due to unforeseen construction problems. However, to the extent this occurs, it will lessen the impacts of the proposed rule as modeled. Higher costs per mile will decrease the average number of miles constructed per year. Fewer miles constructed results in fewer acres disturbed, and therefore lower compliance costs.

14 EPA previously has used an estimate of $ 24.61 million per mile as an estimate for highway project cost ( weighted rural and urban average; FHWA 2001b) . This figure, from the FHWA Office of Program Administration, may reflect many improvement types and other costs that EPA determined should not be included in this analysis. It also contains significant costs for land acquisition, engineering, design, and other work that would not be paid to the contractor for actual construction.

4 23 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4 5. Obligation of Federal Aid Highway Funds for Selected Highway Improvements and Functional Classifications  1995 to 2000. ( Thousands of 1997 dollars)

Type of Improvement Urban Total Interstate Other Freeways and Expressways New Construction Number Of Miles Federal Funds Total Cost Cost per Mile 175 $ 1,231,171 $ 1,393,799 $ 7,984 277 $ 1,226,600 $ 1,584,583 $ 5,714 452 2,457,771 2,978,382 $ 6,591 Relocation Number Of Miles Federal Funds Total Cost Cost per Mile 17 $ 243,936 $ 272,084 $ 16,062 46 $ 213,422 $ 270,509 $ 5,924 63 457,358 542,593 $ 8,668 Reconstruction Added Capacity Number Of Miles Federal Funds Total Cost Cost per Mile 536 $ 2,206,338 $ 2,680,896 $ 5,001 331 $ 1,330,439 $ 1,674,158 $ 5,062 867 3,536,778 4,355,055 $ 5,024 Major Widening Number Of Miles Federal Funds Total Cost Cost per Mile 307 $ 1,086,999 $ 1,273,760 $ 4,152 192 $ 800,507 $ 1,041,609 $ 5,429 499 1,887,507 2,315,369 $ 4,643 Total Number Of Miles Federal Funds Total Cost Cost per Mile 1,034 $ 4,768,445 $ 5,620,539 $ 5,434 846 $ 3,570,968 $ 4,570,860 $ 5,406 1,880 8,339,413 10,191,398 $ 5,421 Source: Based on FHWA 1996 2001, Highway Statistics 1995 2000 , Table FA 10.

4 24 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 4.3 IMPACTS ON MODEL ESTABLISHMENTS In this section EPA presents the methodology used to analyze the establishment level impacts of the proposed rule. Section 4.3.1 outlines the impact analysis for a model establishment undertaking a model project. Section 4.3.2 generalizes and extends this model establishment analysis to estimate the industry wide closure impacts and employment losses due to the proposed regulatory options. Finally,

Section 4.3.3 analyzes whether the proposed rule could present a barrier preventing new firms from entering a market, thereby protecting existing firms from competition.

4.3.1 Model Establishment Analysis This section presents the inputs to the model establishment analysis, discusses the development of balance sheet and income statement information, and develops the methodology for assessing potential regulatory impacts in terms of changes in model establishment financial ratios.

<IP_ADDRESS> Inputs to the Model Establishment Analysis EPA began by identifying data to characterize the typical financial conditions of model businesses in the construction and development industry. This data is used to develop a financial model of the firm, and to analyze the impacts of the regulatory options on firm financial conditions. The sections below present the methodology used to analyze financial impacts on a model firm, and then extend the methodology to project facility closures and employment losses.

The Bureau of the Census recently published a profile of the residential homebuilding industry that allows analysts and others to examine data in ways that were not previously available ( Rappaport and Cole 2000) . In particular, the study presents data by size of builder, where the builder   s size is defined in terms of the number of housing units completed ( previously such breakdowns were available only on the basis of employment size or revenue size) . EPA used this profile to develop financial snapshots of typical residential home builders.

4 25 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 From the profile, EPA determined the average value of construction work ( revenues) completed by builders of various sizes based on the number of housing units started in 1997. EPA combined the average construction revenue data for such builders with more detailed financial data on the homebuilding industry from Dun and Bradstreet ( 2000) ( D& B) . The D& B data was then scaled to the size of the builder in the Census profile, using the ratio of revenues to total assets.

<IP_ADDRESS> Balance Sheet and Income Statement for Model Establishment Table 4 6 presents the balance sheet and income statement for a model firm in the single family residential construction sector. EPA constructed the model firm financial statement using D& B   s 1999

2000 Industry Norms and Key Business Ratios, and the Census special report on the homebuilding industry. The basic approach was to calculate the ratio of key components of the balance sheet and income statement to net sales, and then scale the value of these components to the size of the model firm.

The model firm financials shown in Table 4 6 are based on a firm with $ 1.99 million in revenues, which is the average for homebuilders in the 10 to 24 home per year size class ( one of the size classes defined in the Census report) .

For the single family and multifamily residential construction sectors, EPA constructed a series of model facilities, one for each housing unit starts class. A financial statement for each model firm was generated from these revenue estimates using the method discussed above and illustrated in Table 4 6.

The Census special study covers the single family and multifamily construction sectors, but does not cover the commercial and industrial building construction sectors. To construct model facilities for these sectors, EPA used 1997 Census of Construction data which is available by employment size class. First,

EPA determined the employment class in each sector corresponding to the median sized firm in terms of revenues. This employment class became the basis for a single model facility for each sector. For both the commercial and industrial sectors, median revenues were in the 50 to 99 employee class. Within that employment class, EPA then calculated revenues, employment, and costs per establishment in order to further characterize the model facility.

4 26 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 For the four construction sectors analyzed, EPA used D& B   s   typical   establishment balance sheet data from the following four digit SIC industries: 15   Single family residential construction: SIC 1531   Multifamily residential construction: SIC 1522   Manufacturing and industrial building construction: SIC 1541   Commercial and institutional building construction: SIC 1542   Highway and street construction: SIC 1611 For the model establishment presented in Table 4 6, revenues were determined from Census data. All other components are determined by the percentages taken from the D& B   typical   balance sheet for SIC 1531. The ratio of revenues ( net sales) to total assets is used to determine total assets ( and therefore total liabilities) ; the dollar value of the remaining components are derived using the percentages in the right hand column.

15 Although most of the data used in this economic analysis is reported on an NAICS basis, the most recent D& B report still uses the SIC system for reporting purposes. EPA believes the SIC based data from D& B can be applied to the corresponding NAICS industries, since there is a high degree of overlap in the industry definitions.

4 27 1 2 3 4 5 6 7 8 9   Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4 6. Model Single Family Residential Construction Firm Financial Data Sources: D& B 2000; Census 2000c; CCH 1999. Line Item Dollars Percent Assets Cash $ 163,390 11.9%

Accounts Receivable $ 122,199 8.9%

Notes Receivable $ 9,611 0.7%

Inventory $ 417,399 30.4%

Other Current $ 303,438 22.1%

Total Current Assets $ 1,016,037 74.0%

Fixed Assets $ 216,938 15.8% Other Non current $ 140,049 10.2%

Total Assets $ 1,373,023 100.0%

Liabilities 10 Accounts Payable $ 112,588 8.2%

11 Bank Loans $ 23,341 1.7%

12 Notes Payable $ 201,834 14.7%

13 Other Current $ 391,312 28.5%

14 Total Current Liabilities $ 729,075 53.1%

15 Other Long Term $ 162,017 11.8%

16 Deferred Credits $ 10,984 0.8%

17 Net Worth $ 470,947 34.3% 18 Total Liabilities & Net Worth $ 1,373,023 100.0%

Operating Income 19 Net Sales $ 1,987,009 100.0%

20 Gross Profit $ 453,038 22.8%

21 Net Profit After Tax $ 23,844 1.2%

22 Working Capital $ 286,962 <IP_ADDRESS> Methodology for Analysis of Regulatory Impacts on Model Establishment For each model firm, EPA examined the economic impacts of each regulatory option on four different financial ratios: ( 1) Gross Profit, ( 2) Current, ( 3) Debt to Equity, and ( 4) Return on Net Worth.

Industry publications cite these financial ratios as particularly relevant to the construction industry 4 28 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 ( Kone, 2000; Benshoof, 2001) . Two of the ratios examined are based on operating income ( gross profit,

and return on net worth) , and two are based on the balance sheet statement ( current, and debt to equity) .

Based on literature reviews, industry focus group input, and econometric evidence, EPA believes the level of CPT to customers to be high in the construction industry. Complete, or 100 percent CPT implies zero direct impacts on the construction industry. Complete CPT in the residential sector, for example, essentially results in all compliance costs being capitalized into the cost of the house, which is then assumed to be paid for over 30 years as part of the homebuyer   s mortgage. In this analysis, EPA has taken a conservative approach that results in a   worst case   scenario, , and is based on the opposite extreme   zero CPT. . That is, EPA assumed all compliance costs are borne by the developer builder.

EPA also examined more realistic scenarios incorporating the effects of partial CPT on the builder. EPA used a market model approach to estimate CPT ( i. e. , the ratio of the increase in market price to incremental compliance costs) for each of the four construction sectors analyzed. EPA   s estimates of CPT range from a low of 85 percent for the manufacturing and industrial building sector to a high of 92 percent for the multifamily residential housing sector. Assuming positive CPT, builders incur compliance costs multiplied by one minus the CPT percentage; the remaining costs are passed through to customers in the form of higher prices. 16 Thus, for each compliance cost estimate, EPA examines impacts two ways: first assuming zero CPT, second, assuming positive CPT.

EPA assumes that compliance costs affect each model firm   s balance sheet in the following manner. Construction costs are typically financed with a short term construction loan. The value of the loan tends to run about 80 percent of the value of the project, with the developer providing the remainder of the capital. The simplified balance sheet presented in Table 4 7 illustrates how a construction loan equal to $ Q affects the construction firm   s balance sheet if the lending institution requires the builder to finance 20 percent of the cost of the loan.

16 Assume, for example, that the market analysis shows that housing prices increase by $ 0.80 of every dollar in increased construction costs per unit built, then CPT is 80 percent. If the proposed regulation adds $ 200 in construction costs per house, the builder incurs impacts from $ 40 in increased costs not offset by increased revenues [ ( 1  0.8) * $ 200 ] , while the house buyer pays an additional $ 160 ( 0.8* $ 200) for the house.

4 29 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 The loan reduces current assets by the amount of capital the builder is required to pay but increases noncurrent assets by the total value of the project; long term debt is increased by the amount of the loan ( 0.80Q) . The baseline balance sheet financial ratios for the model firm will be calculated on the basis of the center column, while the post regulatory financial ratios will be calculated on the basis of the right hand column. The value of Q was set equal to the incremental capital compliance costs of the proposed rule. EPA used the same framework for all four sectors analyzed.

Table 4 7. Impact of Compliance Costs on Developer Builder   s Balance Sheet Line item Baseline Post Loan Current Assets $ A $ A  . 20Q Noncurrent assets $ B $ B + Q Total Assets $ A + $ B $ A + $ B + . 80Q Current Liabilities $ D $ D Long Term Debt $ E $ E + . 80Q Net Worth $ F $ F Debt plus Equity $ D + $ E + $ F $ D + $ E + $ F + . 80Q Note: Q equals incremental compliance costs.

<IP_ADDRESS> Analysis of Financial Ratios for Model Establishment Few financial ratios have clearly defined critical values that indicate whether a firm is performing well or poorly. Furthermore, analysts often find that a firm can perform well in one financial category ( debt management, for example) , yet poorly in another ( perhaps rate of return) . Lacking such hard and fast rules for interpreting financial ratios, analysts tend to emphasize trends over time, comparisons among competitors, or comparisons between industries, rather than a single critical value for any particular ratio. The sections below briefly describe the four ratios examined for this analysis.

4 30 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Gross Profit Ratio The gross profit ratio measures the ratio of pretax operating profit to revenues:

gross profit ratio   gross profit   ( net sales & operating costs) net sales net sales Gross profits are line item 20 on the model firm balance sheet and income statement ( Table 4 6)

while net sales are line item 19. This ratio measures the decline in pretax operating income relative to the firm   s volume of business. Under the worst case scenario ( zero CPT) , the post compliance gross profit ratio for the model firm would be:

gross profit ratio   ( net sales & operating costs & pre & tax compliance costs) net sales An increase in compliance costs decreases the value of the gross profit ratio; the firm is relatively worse off.

Return on Net Worth Return on net worth measures the rate of return from the firm relative to the owner   s investment:

return on net worth   net profit after tax net worth Net profit after tax is line item 21 on the model firm balance sheet and income statement ( Table 4 6) while net worth is line item 17. Should the rate of return on this line of business fall too much, then investors have better opportunities for their capital; they would start investing their capital in other industries instead of construction, and the construction industry would contract. Compliance costs reduce net profit, and therefore reduce return on net worth:

4 31 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 return on net worth   ( net profit after tax & post & tax compliance costs) net worth EPA multiplied compliance costs by one minus the effective tax rate to estimate post tax compliance costs. To determine the effective tax rate, EPA assumed taxable income was equal to gross profit ( line item 20 on Table 4 6) ; EPA used Federal corporate tax rates plus the average state corporate tax rate ( 6.6 percent) for the specified level of taxable income. Note that return on net worth is a much more sensitive ratio than the other ratios considered above because it is calculated on a post tax basis.

As can be observed in line item 21, post tax profits are a much smaller percent of net sales than gross profit.

Current Ratio The current ratio is defined as:

current ratio   current assets current liabilities Current assets are line item 6 on the model firm balance sheet and income statement ( Table 4 6)

while current liabilities are line item 14. The current ratio is a liquidity ratio that measures the availability of cash and near cash assets to meet short term obligations. Clearly if current liabilities exceed current assets ( i. e. , the current ratio is less than one) , the firm cannot meet all its short term financial obligations. Although the current ratio has a well defined critical threshold, detrimental financial impacts can occur before the ratio falls below one. Again, using EPA   s conservative worst case assumption to estimate the impact of the proposed rule on the model firms   s finances, the post regulatory current ratio is:

current ratio   ( current assets & . 20 × pre & tax compliance costs) current liabilities An increase in compliance costs decreases the value of the current ratio; the firm is relatively worse off.

4 32 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Debt Management The debt to equity ratio is a ratio that measures how much a firm   s financing has been borrowed from creditors:

total debt debt to equity ratio   owner equity Total debt is the sum of line items 14 ( current liabilities) , 15 ( other long term liabilities) , and 16 ( deferred credits) on the model firm balance sheet and income statement ( Table 4 6) , while owner equity is line item 17 ( net worth) . The debt to equity ratio presents amount of capital borrowed relative to that supplied by the owners. If, for example, the debt to equity ratio is 1.9, then $ 1.90 has been borrowed for every $ 1 of capital provided by the owners. If the debt to equity ratio becomes too high, creditors would be reluctant to lend further capital unless the owners provide more equity. Incremental compliance costs mean that the builder would increase long term debt by the amount of the loan ( 0.80 × capital cost) ) . Thus the post compliance debt to equity ratio is calculated as:

debt to equity ratio   ( total debt % 0. 80 × pre & tax compliance costs) net worth An increase in compliance costs increases the value of the debt to equity ratio and the firm is relatively worse off.

<IP_ADDRESS> Compliance Cost Inputs into Financial Ratio Analysis EPA estimated engineering compliance costs based on project size, climatic, geographical, and other characteristics. To project economic impacts using these costs, EPA determined the costs incurred by each model establishment, then converted these compliance costs to costs per establishment based on the following formula:

costs per establishment   ( costs per acre) × ( acres per start) × ( starts per establishment)

4 33 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 EPA estimated average compliance costs per acre based on project size. These are a weighted average of engineering costs by environmental region ( see section 4.4.3 for details of the weighted average of compliance costs per acre calculation, and section 4.6.2. for discussion of regional characteristics and compliance costs) .

For the single family residential, commercial, and manufacturing construction sectors, the estimated number of units started per establishment is essentially identical to the number of buildings started. For the multifamily residential construction sector, however, Census reports the number of units started, but each building contains a number of units. EPA therefore estimated the average number of units per building to convert units started to buildings started.

Using data from 1999 and 2000, EPA examined the number of units built in various building classes ( e. g. , 35,500 units in buildings containing 2 to 4 units, 48,000 units in buildings containing 5 to 9 units) to construct a weighted average ( U. S. Census Bureau 2000b) . Assuming the midpoint of each building class interval represents the average number of units per building in each class ( e. g. , apartment buildings in the 2 to 4 units per building class contain an average of 3 apartments per building) , EPA divided total units per class by the midpoint of the class to estimate the number of multi unit buildings in each class. EPA then calculated a weighted average of units per building using the class midpoints weighted by the estimated number of buildings constructed in each class. Using this approach, EPA estimated an overall average of 10.8 units per multi family residential building nationwide.

EPA used a variety of sources to estimate average acres per start. For single family residential construction, EPA based its estimate of acres per start on the median lot size from the Census report Characteristics of New Housing ( U. S. Census Bureau, 2000a) . For multifamily residential, commercial,

and industrial sectors, EPA combined data on the typical   building   footprint from R. . S. Means ( 2000)

with the ratio of building footprint to site size from the Center for Watershed Protection ( CWP, 2001) to estimate average acres per start.

For the model highway and street construction contractor, EPA used data from Dun &

Bradstreet, the 1997 Census of Construction , and the 1995 2000 editions of the Federal Highway Administration   s ( FHWA   s) Highway Statistics publication. EPA used 1997 Census data to construct a model highway and street construction establishment based on median revenues for establishments in 4 34 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 NAICS 234110. Using the same methodology EPA developed distributions of financial ratios for Dun &

Bradstreet data for SIC 1611 ( highway and street construction) . To estimate the number of acres disturbed, and hence, total establishment compliance costs, ERG estimated miles of highway constructed per year by dividing model establishment revenues by the estimated cost per mile constructed, $ 5.4 million, which was derived in Table 4 5. 17 4.3.2 Extension of Model Facility Analysis to Project Industry Closures EPA extended the model facility framework described here to project closures and employment losses resulting from the proposed regulation. The primary analysis, based upon analysis of financial ratios, is presented in Section <IP_ADDRESS>. EPA also conducted a sensitivity analysis, comparing the results of the primary analysis to an estimate of closures and employment losses using an alternative approach based on cashflow changes. This alternative approach is outlined in Section <IP_ADDRESS>. The results of the primary analysis are in Section 5.5, while the sensitivity analysis is presented in Appendix 5B. Before explaining these methodologies, however, EPA first presents information on how the number of affected establishments and employees was determined for use in this analysis.

<IP_ADDRESS> Estimation of Affected Establishments and Employment The proposed rule contains three regulatory options, each of which would apply to sites of varying sizes. Option 1 applies to sites of one acre or larger, Option 2 applies to sites of five acres or larger, and Option 3 ( no regulation option) applies to all sites. To accurately reflect the number of entities affected under each option, EPA has adjusted the closure and employment loss methodology to account for the number of establishments affected under each option. This section describes the process used to make these adjustments.

EPA again used data from the Census special study of the home building industry ( Rappaport and Cole, 2000) to obtain the number of establishments by housing unit starts class. EPA concluded that 17 As described in Section 4.2.7, EPA estimated that one mile of highway will disturb 10.67 acres of land.

4 35 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 this data provided the best source for estimating the number of establishments and employees potentially affected under each option. Using the estimated density of 2.67 single family housing units per acre ( see Table 4 2) , establishments starting between one and four single family housing units per year were excluded under Option 1 because they are unlikely to disturb more than one acre on a given project. 18 Establishments in both the 1 4 and 5 9 housing unit starts per year categories were similarly excluded under Option 2, since the maximum number of housing units, nine, equates to only 3.3 acres. 19 This makes it unlikely many builders in these size classes disturb more than five acres on an individual project basis. The Census report estimates that 50,661 single family builders start between one and four housing units per year, while another 12,708 builders start between five and nine units per year. EPA further concluded that 1,904 multifamily builders starting between two and nine multifamily units per year are unlikely to disturb more than five acres on a given project, and excluded these from the universe of establishments potentially affected under Option 2. Affected employment is determined in the same manner as affected establishments. The Census study reports the number of employees in each housing unit start category, and this number is subtracted as above under each option.

The adjustments above were made for the residential construction industries only. There are two reasons for this: ( 1) the Census special study only covers single family and multifamily residential construction establishments; and ( 2) EPA believes that commercial and industrial building establishments are overall more likely to disturb five acres or more during the course of each project. Therefore, no adjustments are made to the nonresidential building establishment and employment counts.

Table 4 8 shows the establishment count adjustment for each option, while Table 4 9 shows the adjustment to employment.

18 Using the density of 2.67 units per acre, four housing units per year equates to a maximum of 1.5 acres. This makes it unlikely a large percentage of establishments in the 1 4 housing units per year category disturb more than one acre at a time on a regular basis.

19 Again, this would be the maximum land area disturbed in a year. The maximum disturbed on an individual project could be even less.

4 36

    Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4 8. Number of Establishments in the Construction and Development Industry Adjusted for Regulatory Option Coverage Industry Baseline [ a ] Option 1 Option 2 Adjustment for 1 acre exclusion Adjusted Number Adjustment for 5 acre exclusion Adjusted Number Single family 84,731 ( 50,661) 34,070 ( 12,708) 21,362 Multifamily 4,603 4,603 ( 1,904) 2,699 Commercial 39,810 39,810 39,810 Industrial 7,742 7,742 7,742 Potentially affected establishments 136,886 86,225 71,613 [ a ] Previously adjusted for remodeling establishments and land development establishments. . See Section 2.3.5 for discussion of this adjustment. Figures may not add to totals due to rounding. Source: Rappaport and Cole ( 2000) and EPA estimates.

Table 4 9. Employment in the Construction and Development Industry Adjusted for Regulatory Option Coverage Industry Baseline [ a ] Option 1 Option 2 Adjustment for 1 acre exclusion Adjusted Number Adjustment for 5 acre exclusion Adjusted Number Single family 340,874 ( 128,940) 211,933 ( 41,940) 169,993 Multifamily 35,160 35,160 ( 6,064) 29,096 Commercial 549,567 549,567 549,567 Industrial 148,861 148,861 148,861 Potentially affected employees 1,074,462 945,521 897,517 [ a ] Previously adjusted for remodeling establishments and land development establishments. . See Section 2.3.5 for discussion of this adjustment. Figures may not add to totals due to rounding. Source: Rappaport and Cole ( 2000) and EPA estimates.

4 37 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 <IP_ADDRESS> Closure and Employment Impacts Based on Financial Ratio Analysis To assess the impacts on firm closures, EPA first selected a criterion for determining when a facility is considered   impacted   by the proposed rule. . As discussed above, financial ratios rarely have well defined thresholds that correlate with financial health or distress. On previous effluent guidelines ( e. g. , MP& M) , EPA has defined the critical value for financial stress as that value of a financial ratio that defines the poorest performing 25 percent of firms ( i. e. , the lowest quartile) . EPA then assumes that a facility is financially stressed if its pre regulatory financial ratio lies above the lowest quartile for that ratio, but its post regulatory ratio falls in that lowest quartile range. 20 To estimate the number of establishments in each industry that would be financially distressed by the proposed regulation, EPA first approximated a cumulative distribution function for each financial ratio based on D& B data. Figure 4 1 illustrates the current ratio cumulative distribution function for SIC 1531, used to analyze single family residential construction. The baseline curve represents the pre

regulatory cumulative distribution function. This curve indicates that 25 percent of establishments have a current ratio below 1.1 ( 1.1 thus becoming the critical value for determining financial distress) , 25 percent of establishments have a current ratio greater than 1.1 but less 1.4 ( the median) , 25 percent have a current ratio greater than 1.4 but less than 2.9, and 25 percent have a current ratio greater than 2.9. 21 20 For example, according to D& B, 25 percent of establishments in SIC 1531 have a current ratio less than 1.1, and 75 percent have a current ratio greater than 1.1. If an establishment   s pre regulatory current ratio is greater than 1.1, but its post regulatory current ratio is less than 1.1, EPA would classify the firm as financially distressed.

21 The minimum and maximum values for the current ratio are not provided by D& B. For completeness EPA selected   reasonable   values to represent the end points of the curve. . This has no effect on the analysis because the lowest and highest ranges are not used in the analysis.

4 38 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 EPA then calculates the post regulatory current ratio for the quartile values. This shifts the cumulative distribution function for the current ratio to the left. Using the post regulatory curve in this example, approximately 40 percent of establishments now have current ratios less than or equal to the critical value of 1.1. Thus, about 15 percent of establishments in this sector incur incremental financial Figure 4 1 Pre  and Post regulatory Cumulative Distribution Function for Current Ratio SIC 1531: Ope rative Builde rs 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 Current Ratio Probability Baseline Postregulatory Critical Value distress due to compliance costs ( i. e. , 40 percent below 1.1 on the post regulatory curve minus 25 percent below 1.1 in the baseline) .

4 39 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 A firm that exhibits or experiences financial distress under a single measure of financial performance would not necessarily always shut down. Therefore, EPA constructed similar cumulative distribution functions for the debt to equity, and return on net worth ratios, then estimated the probability of incremental financial distress under each measure. 22 To assess the economic achievability of the proposed rule, EPA assumes that the probability of establishment closure due to incremental compliance costs is equal to the average probability of incremental financial distress under each of the three financial ratios: current, debt to equity, and return on net worth. Multiplying this probability by the number of establishments in the sector, EPA obtains an estimate of the number of establishments projected to close due to the proposed regulation. Intuitively, EPA is making an implicit assumption that establishments incurring financial distress under one ratio are also incurring distress under the other two ratios. If an establishment is distressed under multiple measures of financial health, it is highly likely the establishment will close. 23 Employment losses are estimated by multiplying the number of establishments projected to close by the average number of employees per establishment.

Finally, to project sector wide impacts, EPA aggregated closure and employment impacts over all combinations of model establishments and project sizes examined. Thus, closures for a single sector are calculated as a weighted average where the weights are determined by: ( 1) the relative frequency of establishments represented by each model in the sector, and ( 2) the relative frequency of a particular project size among all projects performed by the sector. EPA also adjusted the universe of affected establishments to reflect the regulatory coverage of each option. Thus, for Option 1 ( which applies to sites of one acre or greater) EPA excluded establishments in the 1 4 housing starts category on the assumption that few of these small builders are likely to disturb more than one acre per project. Similarly,

where Option 2 would apply to sites of five acres or more, EPA excluded establishments in both the 1 4 22 D& B does not provide quartile values for the gross profit ratio.

23 A strict interpretation of this implicit assumption would result in EPA always selecting the smallest probability of incremental financial distress from among the three measure. However, EPA determined this was not analytically desirable because the results would always be determined by the least sensitive measure of distress. Therefore, EPA selected an average of the three probabilities to measure closure rates. Note that in reality, establishments may incur distress under one ratio, but not under another, thus being less likely to close. It is possible that the set of establishments incurring distress under the current ratio, for example, is completely separate from the set of establishments incurring distress under the debt to equity ratio. However, EPA has no information on which to base an estimate of such joint probabilities. Assuming the sets of establishments incurring distress are identical results in a more conservative estimate of closures.

4 40 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 and 5 9 housing starts class. Assuming the national average of density of 2.67 houses per acre ( see Table 4 2) a five acre site would support an average of 13.3 housing units.

<IP_ADDRESS> Closure and Employment Impacts Based on Cashflow Analysis As a check on the financial ratio based approach to projecting establishment closure impacts,

EPA developed a cashflow model and constructed a statistical distribution of establishments around each representative model. This allowed EPA to estimate the probability that establishments would have insufficient cashflow to afford the estimated compliance costs.

Modern financial theory states that an investment should not be undertaken if cashflow is expected to be negative after the investment is undertaken ( Brealy and Myers, 1996; Brigham and Gapenski, 1997) . In the context of this proposed rule, if compliance costs exceed cashflow, then post

regulatory cashflow would be negative. Under these circumstances EPA projects that the establishment would close; EPA has used this standard for projecting establishment closures for a number of past effluent guidelines ( e. g. , Transportation Equipment Cleaning, Industrial Laundries, Iron and Steel) .

Basing the cashflow analysis on the model facilities only means that all establishments represented by a particular model would be projected to remain open if the model establishment earns cashflow exceeding compliance costs, and all would close if the model establishment   s cashflow is less than estimated compliance costs. In reality, the model establishment represents a family of establishments, some with greater cashflow than the model, some with less cashflow than the model.

Thus, there is some probability that establishments would close due to compliance costs even if the model establishment   s cashflow exceeds compliance costs. By developing a probability distribution for each model establishment   s cashflow with known mean and variance, EPA can estimate this probability.

Multiplying the probability that compliance costs exceed cashflow ( i. e. , that post regulatory cashflow is negative) by the number of establishments represented by the model, EPA obtains the projected number of closures for that option. To develop the cashflow distribution, EPA first estimated the mean and variance of cashflow associated with each model establishment. EPA based its estimate of mean cashflow on the 1997 Census of Construction. EPA calculated average revenues, payroll, material costs,

and work subcontracted out to others within each model class ( starts class for single and multifamily residential, employment class for commercial and manufacturing sectors) by dividing each Census value 4 41 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 by the number of establishments in the class. EPA then estimated taxable income per model establishment as: revenues minus payroll, material costs, and work subcontracted out to others.

Adjusting taxable income for taxes and interest payments results in estimated model establishment cashflow. EPA applied Federal corporate tax rates, plus the average state corporate tax rate to establishment income. EPA assumed interest payments comprise 25 percent of taxable income.

EPA based its estimate of the variance of each model establishment   s cashflow distribution on the U. S. Small Business Administration   s   births and deaths   database, , a special tabulation prepared for SBA by Census ( SBA 1999) . EPA calculated the ratio of establishment closures to total establishments for the 1989 to 1998 time period at the four digit SIC level from this database. 24 Assuming these establishments were closing because their cashflow was less than zero, EPA used the model mean and the assumption of a normal distribution to estimate the variance for the distribution that would result in a probability of zero cashflow ( or less) equal to the closure rate estimated from the births and deaths database.

With estimated mean, variance, and assumed distribution of cashflow for each model establishment, it is a straightforward exercise to estimate the probability of closure due to the proposed rule. Figure 4 2 illustrates how this analysis was conducted. The   estimated normal   curve represents the distribution of a model establishment with mean cashflow of $ 1 million, and a variance set so that the probability of cashflow less than zero is about 17 percent ( as determined from SBA   s   births and deaths   database) ) . The critical value is equal to estimated compliance costs   in this example set equal to $ 400,000. 25 Figure 4 2 shows that based on this distribution, about 27 percent of establishments earn cashflow less than estimated compliance costs. However, 17 percent of establishments had negative cashflow prior to incurring the compliance costs ( i. e. , the   baseline closures   ) . Therefore, about 10 percent of establishments in this example would be projected to close due to the regulation ( e. g. , 27 24 Note that the level of detail in the database was sufficient to allow EPA to estimate separately the closure rates for small and large business establishments.

25 This large estimated compliance cost was selected only for the purposes of making the figure clear and does not reflect actual anticipated compliance costs.

4 42 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Figure 4 2 Baseline Distribution Function with Bounds for Facility Cashflow 0.00 0.25 0.50 0.75 1.00 $ 0 $ 1,000 $ 2,000 $ 3,000 $ 4,000 Cashflow ( x $ 1,000) Probability Estimated Normal Lower Bound Upper Bound Critical Value percent with cashflow less than compliance costs minus the 17 percent with cashflow less than zero) . If 150 establishments are in this model class, and the average employment per establishment is 20 workers in this class, than EPA would project 15 establishments would close and 300 employees would lose their jobs due to the regulation.

Because of the uncertainties inherent in estimating cashflow and variance for this analysis, EPA estimated a range of closure and employment impacts. EPA created upper and lower bounds to its 4 43 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 estimated cashflow distribution by multiplying the distribution   s variance by plus/ minus 25 percent. This creates the bands observed around the estimated normal distribution in Figure 4 2. Therefore, although the methodology follows the logic outlined above, EPA reports an upper and lower bound for projected closures based on bands around the actual estimated variance of cashflow. The results of this analysis are presented in Appendix 5A.

4.3.3 Analysis of Barriers to Entry Barriers to entry are typically assumed to occur if the cost of complying with a regulation substantially increases the firm start up costs. For example, if a rulemaking required that all facilities invest substantially in a wastewater treatment system, then an entrepreneur might be discouraged from starting an enterprise. The increased capital cost serves as a barrier to new entry to the industry.

The situation in the construction industry is somewhat different than that outlined above. In terms of the capital expense needed to start a firm, the proposed rule has little direct impact. The proposed rule does not require a firm to purchase and install any capital equipment, and thus the level of capital expenditures required to start up a firm are not directly affected by the proposed rule.

Landis ( 1986; see section <IP_ADDRESS>.2 for details) identifies two significant classes of barrier to entry specific to the construction industry that are not related to capital equipment: ( 1) entry costs to participate in a given market ( e. g. , local development fees or abnormally high land costs) , and ( 2) input cost differentials ( e. g. , the new entrant must pay a higher price for inputs than existing firms) . These barriers to entry, however, also appear unaffected by the proposed rule. To the extent that either of these barriers already exist in any given market, they would not be differentially impacted by the proposed rule.

As the model establishment analysis shows, the proposed rule might increase borrowing to finance building projects. This could affect a potential industry entrant indirectly in that it may need marginally more start up capital in order to obtain the somewhat larger short term construction loan to undertake a project. Once again, however, the new entrant would still face essentially the same requirements that existing firms face to secure a loan. Thus, new entrants should not be differentially 4 44 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 affected by the proposed rule in such a way that they would be unable to compete effectively with existing firms.

To examine the potential for barriers to entry, EPA calculated the ratio of estimated compliance costs to each model establishment   s current assets and total assets. If these ratios are small, then EPA concludes that the proposed rule would have little effect on the ability of a new entrant to find financing for a project. Note that in this analysis EPA compares total compliance costs to assets. This step probably overestimates impacts. It is more likely that a new entrant would need to provide only 20 percent of the incremental compliance costs and would obtain the remaining 80 percent from conventional construction loan financing sources ( see Section <IP_ADDRESS>)   as would an existing firm. .

4.4 NATIONAL COMPLIANCE COSTS As noted above, EPA developed engineering costs for four categories of land use ( single family residential, multifamily residential, commercial, and industrial) and six project size categories ( 1, 3, 7.5,

25, 70, and 200 acres) . Estimates of the national costs of the effluent guidelines regulations are obtained by multiplying the per acre costs developed for each land use and size class combination by the number of acres of each type estimated to be developed each year; taking into account the applicability of each option in terms of site size.

Estimates of the number of acres developed nationally per year are available from the U. S.

Department of Agriculture   s ( USDA   s) National Resources Inventory ( NRI) . This source does not,

however, identify the type of development or subsequent nature of the land use, nor the distribution of acreage by site size. The following sections describe the NRI estimates and EPA   s approach to distributing the developed acreage by type of development and site size.

4.4.1 National Estimates of Disturbed Acreage The NRI, a program of the USDA   s Natural Resources Conservation Service, is designed to track changes in land cover and land use over time. The inventory, conducted every five years, covers all non

4 45 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Federal land in the United States ( 75 percent of the U. S. total) . The program captures land use data from some 800,000 statistically selected locations. From 1992 to 1997, an average of 2.24 million acres per year was converted from nondeveloped to developed status ( USDA, 2000) . Table 4 10 shows the allocation of this converted land area by type of land or land cover. As seen, land previously classified as forest land accounted for 41.9 percent of the total, while land previously classified as cropland accounted for 25.6 percent and land previously classified as pastureland accounted for 17.4 percent. No further breakdown by type of converted land use is available.

EPA assumes that some of the 2.24 million acres converted from an undeveloped to developed state each year would be exempt from the requirements of the proposed rule due to small site or low soil

loss potential waivers. Based on the engineering analysis of sites likely to be eligible for such waivers,

EPA has reduced the acreage subject to active construction controls to 2.18 million acres ( U. S. EPA,

2002) .