MEMORANDUM
Eastern
Research
Group,
Inc.
110
Hartwell
Avenue
Lexington,
MA
02421
Date:
July
10,
2003
To:
James
Covington,
EPA
From:
Cal
Franz,
ERG
Re:
Sensitivity
Analysis:
Closure
Impacts
Assuming
 
1
Failure
Standard 

The
following
tables
contain
a
sensitivity
analysis
comparing
projected
closure
impacts
under
alternative
assumptions
for
measuring
incremental
closures
in
the
closure
model.
For
proposal,
EPA
stated
that
its
methodology
would
count
a
facility/
company
as
an
incremental
closure
caused
by
the
rule
if
the
net
present
value
(
NPV)
of
future
compliance
costs
exceeds
the
NPV
of
projected
net
income
under
three
of
five
projection
methods
(
hereafter,
the
 
3
failure
standard ).
For
this
sensitivity
analysis,
EPA
counts
a
facility/
company
as
an
incremental
closure
caused
by
the
rule
if
the
NPV
of
future
compliance
costs
exceeds
the
NPV
of
projected
net
income
under
one
of
five
projection
methods
(
hereafter,
the
 
1
failure
standard ).

Under
the
1
failure
standard,
there
will
be
a
larger
number
of
baseline
closures.
Under
the
3
failure
standard,
a
facility/
company
is
considered
a
 
baseline
closure 
if
the
NPV
of
its
future
net
income
is
less
than
zero
under
at
least
three
of
the
five
income
forecasts.
For
consistency,
under
the
1
failure
standard,
a
facility/
company
will
be
considered
a
baseline
closure
if
the
NPV
of
its
future
net
income
is
less
than
zero
under
one
of
the
five
income
forecasts.

Tables
1A
and
2A
present
the
closure
results
at
the
facility
and
company
level
respectively
under
the
1
failure
standard
as
requested
by
OMB.
Tables
1B
and
2B
present
the
results
under
the
3
failure
standard
and
are
included
for
comparison.
Closure
results
are
presented
as
a
percentage
of
all
facilities/
companies
in
the
subcategory
and
as
a
percent
of
facilities/
companies
eligible
to
close
in
the
subcategory
(
total
facilities
minus
baseline
closures
minus
those
not
analyzable).

Facility
Level
Analysis
Using
the
1
failure
standard,
there
is
1
incremental
facility
closure
projected
under
all
options
in
Subcategory
A
through
D
(
Table
1A);
there
were
no
incremental
closures
projected
for
any
option
in
this
subcategory
under
the
3
failure
standard
(
Table
1B).

The
results
in
Subcategory
K
are
identical
under
both
standards:
7
facilities
are
projected
to
close
under
Option
4.

However,
the
1
failure
standard
increases
the
number
of
baseline
closures
in
each
subcategory.
In
subcategory
A
through
D,
there
are
7
baseline
closures
under
the
1
failure
standard
compared
to
2
baseline
closures
under
the
3
failure
standard.

1
In
subcategory
K,
there
are
15
baseline
closures
under
the
1
failure
standard
compared
to
10
baseline
closures
under
the
3
failure
standard.

Company
Level
Analysis
Using
the
1
failure
standard,
there
is
1
incremental
company
closure
projected
under
all
options
among
red
meat
companies
(
Table
2A);
there
were
none
under
the
3
failure
standard
(
Table
2B).

For
poultry
companies,
the
results
are
similar
under
both
standards:
1
company
is
projected
to
close
under
Option
2
+
P,
Option
2.5
+
P,
and
Option
4.
However,
the
projected
closures
are
different
under
the
two
standards:
the
company
projected
to
close
is
larger
under
the
1
failure
standard
than
the
3
failure
standard
in
terms
of
revenues
and
employment.

For
mixed
meat
companies,
1
company
is
projected
to
close
under
Option
2
+
P,
Option
2.5
+
P,
and
Option
4
based
on
the
1
failure
standard,
while
none
were
projected
to
close
under
the
3
failure
standard.

Again,
the
1
failure
standard
increases
the
number
of
baseline
closures
in
each
meat
type.
Among
red
meat
companies
there
are
2
baseline
closures
under
the
1
failure
standard
compared
to
1
baseline
closure
under
the
3
failure
standard.
For
poultry
companies
there
are
8
baseline
closures
under
the
1
failure
standard
compared
to
6
baseline
closures
under
the
3
failure
standard.
For
mixed
meat
companies,
there
is
1
baseline
under
the
1
failure
standard
compared
to
none
under
the
3
failure
standard.

The
increase
in
baseline
closures
explains
why
the
projected
revenue
and
employment
impacts
among
poultry
companies
are
larger
under
the
1
failure
standard
even
though
the
same
number
of
companies
are
projected
to
close
under
both
standards.
The
projected
company
closure
under
the
3
failure
standard
becomes
a
baseline
closure
under
the
1
failure
standard.

Other
Comments
on
the
Relevance
of
the
1
Failure
Standard
to
the
MPP
Industry
EPA s
standard
methodology
when
using
income
forecasts
in
closure
models
is
to
use
a
 
weight
of
evidence 
approach
across
a
set
of
reasonable
assumptions
regarding
future
cyclical
industry
behavior.
This
approach
has
been
used
and
litigated
since
the
Pulp
and
Paper
rule.
This
allows
EPA
to
reflect
uncertainty
in
the
forecasts
and
without
placing
undue
emphasis
on
any
single
 
timing
and
initial
conditions 
sensitive
result.
Using
a
1
failure
standard,
projected
closures
would
be
highly
susceptible
to
timing
and
initial
conditions
of
the
forecast.
As
a
result,
the
methodology
could
be
vulnerable
to
a
charge
of
being
 
arbitrary
and
capricious. 

EPA
did
use
the
1
failure
standard
for
the
closure
analysis
of
the
Final
Iron
and
Steel
rule;
a
3
failure
standard
was
used
for
the
proposal.
This
was
due
to
the
rapid
deterioration
in
financial
conditions
in
the
iron
and
steel
industry.
Approximately
30
company,
accounting
for
over
25
percent
of
national
capacity,
declared
bankruptcy
in
an
18
month
period.
The
financial
crisis
was
so
deep
and
so
sudden
that
no
precedent
existed
in
the
historical
data
to
completely
model
the
decline.

EPA
has
seen
no
evidence
in
either
the
meat
or
poultry
industries
of
a
decline
equivalent
to
such
a
 
Doomsday 
scenario.
The
5
income
forecasts
do
not
yield
any
growth,
and
thus
are
very
conservative.
To
compound
the
effect
of
this
set
of
forecasts
with
an
overly
restrictive
1
failure
standard
would
be
far
too
conservative
a
methodology
for
projecting
closure
impacts
on
this
industry.

2
Table
1A
Summary
of
Projected
Facility
Closure
Impacts
by
Subcategory
and
Option
Sensitivity
Analysis:
Closure
if
Facility
Fails
Under
1
of
5
Discounted
Net
Income
Projections
Option
2
Option
2+
P
Option
2.5
Option
2.5+
P
Option
4
Total
Baseline
Facilities
not
Variable
in
Class
Closure*
Analyzed**
Number
Percent
Number
Percent
Number
Percent
Number
Percent
Number
Percent
Subcategory
A
through
D
Impacts
as
Percent
of
Total
Facilities
39
7
21
1
2.8%
1
2.8%
1
2.8%
1
2.8%
1
2.8%

Revenues
($
000)
$
9,303,506
$
3,639,690
NA
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
Employees
48,114
13,314
NA
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
Impacts
as
Percent
of
(
Total
­
Baseline
Closures
­
Not
Analyzed)

Facilities
39
7
21
1
10.1%
1
10.1%
1
10.1%
1
10.1%
1
10.1%

Revenues
($
000)
$
9,303,506
$
3,639,690
NA
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
Employees
48,114
13,314
NA
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
Subcategory
K
Impacts
as
Percent
of
Total
Facilities
118
15
84
0
0.0%
0
0.0%
0
0.0%
0
0.0%
7
6.4%

Revenues
($
000)
$
4,023,230
$
1,908,703
NA
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%
CBI
CBI
Employees
112,491
15,703
NA
0
0.0%
0
0.0%
0
0.0%
0
0.0%
CBI
CBI
Impacts
as
Percent
of
(
Total
­
Baseline
Closures
­
Not
Analyzed)

Facilities
118
15
84
0
0.0%
0
0.0%
0
0.0%
0
0.0%
7
40.6%

Revenues
($
000)
$
4,023,230
$
1,908,703
NA
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%
CBI
CBI
Employees
112,491
15,703
NA
0
0.0%
0
0.0%
0
0.0%
0
0.0%
CBI
CBI
*
Baseline
closures
are
facilities
projected
to
have
a
negative
NPV
under
at
least
1
of
5
forecasting
methods
prior
to
regulatory
costs.

**
Facilities
not
analyzed
due
to
a
lack
of
survey
data.
Table
1B
Summary
of
Projected
Facility
Closure
Impacts
by
Subcategory
and
Option
Closure
if
Facility
Fails
Under
3
of
5
Discounted
Net
Income
Projections
Option
2
Option
2+
P
Option
2.5
Option
2.5+
P
Option
4
Total
Baseline
Facilities
not
Variable
in
Class
Closure*
Analyzed**
Number
Percent
Number
Percent
Number
Percent
Number
Percent
Number
Percent
Subcategory
A
through
D
Impacts
as
Percent
of
Total
Facilities
39
2
21
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

Revenues
($
000)
$
9,303,506
CBI
NA
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%

Employees
48,114
CBI
NA
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

Impacts
as
Percent
of
(
Total
­
Baseline
Closures
­
Not
Analyzed)

Facilities
39
2
21
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

Revenues
($
000)
$
9,303,506
CBI
NA
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%

Employees
48,114
CBI
NA
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

Subcategory
K
Impacts
as
Percent
of
Total
Facilities
118
10
84
0
0.0%
0
0.0%
0
0.0%
0
0.0%
7
6.4%

Revenues
($
000)
$
4,023,230
$
1,584,596
NA
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%
CBI
CBI
Employees
112,491
13,258
NA
0
0.0%
0
0.0%
0
0.0%
0
0.0%
CBI
CBI
Impacts
as
Percent
of
(
Total
­
Baseline
Closures
­
Not
Analyzed)

Facilities
118
10
84
0
0.0%
0
0.0%
0
0.0%
0
0.0%
7
33.1%

Revenues
($
000)
$
4,023,230
$
1,584,596
NA
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%
CBI
CBI
Employees
112,491
13,258
NA
0
0.0%
0
0.0%
0
0.0%
0
0.0%
CBI
CBI
*
Baseline
closures
are
facilities
projected
to
have
a
negative
NPV
under
at
least
3
of
5
forecasting
methods
prior
to
regulatory
costs.

**
Facilities
not
analyzed
due
to
a
lack
of
survey
data.
Table
2A
Summary
of
Projected
Company
Closure
Impacts
by
Meat
Type
and
Option
Sensitivity
Analysis:
Closure
if
Company
Fails
Under
1
of
5
Discounted
Net
Income
Projections
Option
2
Option
2+
P
Option
2.5
Option
2.5+
P
Option
4
Total
Baseline
Variable
in
Class
Closure*
Number
Percent
Number
Percent
Number
Percent
Number
Percent
Number
Percent
Red
Meat
(
Subcategories
A
through
I)

Impacts
as
Percent
of
Total
Companies
9
2
1
11.1%
1
11.1%
1
11.1%
1
11.1%
1
11.1%

Revenues
($
000)
$
29,949,011
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
Employees
80,755
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
Impacts
as
Percent
of
(
Total
­
Baseline
Closures
­
Not
Analyzed)

Companies
9
2
1
14.3%
1
14.3%
1
14.3%
1
14.3%
1
14.3%

Revenues
($
000)
$
29,949,011
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
Employees
80,755
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
CBI
Poultry
(
Subcategories
K
and
L)**

Impacts
as
Percent
of
Total
Companies
13
8
0
0.0%
1
7.7%
0
0.0%
1
7.7%
1
7.7%

Revenues
($
000)
$
15,455,223
$
4,343,255
$
0
0.0%
CBI
CBI
$
0
0.0%
CBI
CBI
CBI
CBI
Employees
136,000
35,580
0
0.0%
CBI
CBI
0
0.0%
CBI
CBI
CBI
CBI
Impacts
as
Percent
of
(
Total
­
Baseline
Closures
­
Not
Analyzed)

Companies
13
8
0
0.0%
1
20.0%
0
0.0%
1
20.0%
1
20.0%

Revenues
($
000)
$
15,455,223
$
4,343,255
$
0
0.0%
CBI
CBI
$
0
0.0%
CBI
CBI
CBI
CBI
Employees
136,000
35,580
0
0.0%
CBI
CBI
0
0.0%
CBI
CBI
CBI
CBI
Mixed
Impacts
as
Percent
of
Total
Companies
4
1
0
0.0%
1
25.0%
0
0.0%
1
25.0%
1
25.0%

Revenues
($
000)
$
89,439,473
CBI
$
0
0.0%
CBI
CBI
$
0
0.0%
CBI
CBI
CBI
CBI
Employees
184,834
CBI
0
0.0%
CBI
CBI
0
0.0%
CBI
CBI
CBI
CBI
Impacts
as
Percent
of
(
Total
­
Baseline
Closures
­
Not
Analyzed)

Companies
4
1
0
0.0%
1
33.3%
0
0.0%
1
33.3%
1
33.3%

Revenues
($
000)
$
89,439,473
CBI
$
0
0.0%
CBI
CBI
$
0
0.0%
CBI
CBI
CBI
CBI
Employees
184,834
CBI
0
0.0%
CBI
CBI
0
0.0%
CBI
CBI
CBI
CBI
*
Baseline
closures
are
companies
projected
to
have
a
negative
NPV
under
at
least
1
of
5
forecasting
methods
prior
to
regulatory
costs.

**
One
company
not
analyzed
due
to
lack
of
survey
data.
Table
2B
Summary
of
Projected
Company
Closure
Impacts
by
Meat
Type
and
Option
Closure
if
Company
Fails
Under
3
of
5
Discounted
Net
Income
Projections
Option
2
Option
2+
P
Option
2.5
Option
2.5+
P
Option
4
Total
Baseline
Variable
in
Class
Closure*
Number
Percent
Number
Percent
Number
Percent
Number
Percent
Number
Percent
Red
Meat
(
Subcategories
A
through
I)

Impacts
as
Percent
of
Total
Companies
9
1
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

Revenues
($
000)
$
29,949,011
CBI
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%

Employees
80,755
CBI
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

Impacts
as
Percent
of
(
Total
­
Baseline
Closures)

Companies
9
1
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

Revenues
($
000)
$
29,949,011
CBI
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%

Employees
80,755
CBI
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

Poultry
(
Subcategories
K
and
L)**

Impacts
as
Percent
of
Total
Companies
13
6
0
0.0%
1
7.7%
0
0.0%
1
7.7%
1
7.7%

Revenues
($
000)
$
15,455,223
$
3,398,090
$
0
0.0%
CBI
CBI
$
0
0.0%
CBI
CBI
CBI
CBI
Employees
136,000
31,192
0
0.0%
CBI
CBI
0
0.0%
CBI
CBI
CBI
CBI
Impacts
as
Percent
of
(
Total
­
Baseline
Closures)

Companies
13
6
0
0.0%
1
14.3%
0
0.0%
1
14.3%
1
14.3%

Revenues
($
000)
$
15,455,223
$
3,398,090
$
0
0.0%
CBI
CBI
$
0
0.0%
CBI
CBI
CBI
CBI
Employees
136,000
31,192
0
0.0%
CBI
CBI
0
0.0%
CBI
CBI
CBI
CBI
Mixed
Impacts
as
Percent
of
Total
Companies
4
0
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

Revenues
($
000)
$
89,439,473
$
0
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%

Employees
184,834
0
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

Impacts
as
Percent
of
(
Total
­
Baseline
Closures)

Companies
4
0
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

Revenues
($
000)
$
89,439,473
$
0
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%

Employees
184,834
0
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

*
Baseline
closures
are
companies
projected
to
have
a
negative
NPV
under
at
least
1
of
5
forecasting
methods
prior
to
regulatory
costs.

**
One
company
not
analyzed
due
to
lack
of
survey
data.
