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Water: Aquaculture

Effluent Guidelines: Letter from EPA to the National Aquaculture Association

October 12, 2000

Betsy Hart, Executive Director
National Aquaculture Association
9 Veranda Lane
Blythewood, SC 29016

Dear Betsy:

As a follow up to our recent discussions at the JSA / EPA meetings, I would like to provide additional information about EPA's data collection efforts and the economic analyses that will accompany the proposed rule. Particularly, I would like to convey the overall importance that economic analyses will play in developing the proposed requirements and explain the analytical approaches currently being considered by the Agency.

Let me start by thanking you for your participation in this process, especially for your efforts in coordinating the exchange of information between the Agency and your constituents. The Agency is committed to maintaining an open process that allows for full stakeholder participation throughout the various stages of rule development. EPA values the expertise that you and your constituents bring to this project.

Before discussing the different data sources and analytical approaches, I want to remind you that EPA will support the proposed rule with engineering, environmental, and economic analyses. These analyses need to be as accurate as possible, and thus, be based on high quality data. The results of these analyses serve multiple purposes; they will be used both internally by EPA in making decisions and externally by stakeholders when reviewing and commenting on the Agency's decisions. The issue in question right now is not whether these analyses will be conducted, but rather what data sources will be used and what analytical approaches can, or cannot, be used with a given data source.

As outlined more fully below, we have preliminarily structured an economic analysis that will rely on farm-level financial data. Our plan is to collect these data from individual farms. EPA's authority to collect information directly from individual operators is included in the Clean Water Act. Specifically, the section titled "Inspections, Monitoring, and Entry," which we commonly refer to by its number-Section 308-gives EPA's Administrator the authority to gather information to develop effluent regulations. Although, at first glance, this approach might appear intrusive and burdensome, it is also efficient and effective. High quality data for an economic analysis of this industry mean data that represent the diversity in the industry. Publicly available data is unlikely to provide the amount of detail -- especially for small farms -- that would produce the most comprehensive analysis. As we have discussed and as EPA has heard from many industry representatives, the individual farmers are concerned about economic impacts. We share many of these concerns. Our economic analysis will predict the number and severity of potential impacts. The accuracy and precision of those results is likely to be influenced by the level of detail of the data.

Our plan, then, is to send a questionnaire to many types of aquaculture facilities, covering different operation sizes, species, and production types. JSA Aquaculture Effluents Task Force (AETF) members and their constituents reviewed a preliminary draft of the questionnaire, and we received numerous helpful comments. To the extent possible, we incorporated all of the substantive comments and prepared another draft. This version, along with an extensive supporting statement that explains how the data in each question would be used, will be submitted to the Office of Management and Budget (OMB) and will be available again for public comment.

The comments we received on the first draft of the questionnaire indicated some misunderstandings about the need for, and uses of, the detailed farm-level financial data. Commentors described the questions as invasive and unnecessary. Further, commentaries suggested that EPA would use the data to set the proposed standards such that every bit of existing profit, however small, would need to be spent on pollution control. Hopefully, information contained in the questionnaire's supporting statement, and highlighted in this letter, can be used to "set the record straight" and to explain, clearly and fully, the Agency's rationale for the questionnaire. We will post the supporting statement and the draft questionnaire on our web site for easy access and will distribute paper copies to AETF once we have published the Federal Register notice for OMB review.

I understand that many of your constituents are concerned about the burden associated with answering the questionnaire. The Agency is aware of, and sensitive to, this burden. To address the concerns about burden, we first investigated whether the data and information were available through less burdensome mechanisms, such as existing Agency databases or publicly available reports. Second, EPA will continue to try to reduce the burden by giving full consideration to all comments suggesting that a question(s) should be eliminated because it is unnecessary for the analysis. Third, EPA will have toll-free helpless in place to help respondents complete the questionnaire with the least possible effort.

I would like to use this letter as an opportunity to emphasize the importance of comments and offer some suggestions on how to prepare useful comments. If a question should be re-worded, or a table restructured to reduce the burden or to clarify the question, please make these suggestions. Similarly, we encourage comments on ways to improve formatting that would reduce the burden. We also request comments on the content of the questionnaire. In this case, it is most helpful when stakeholders structure their comments so that their thought is complete and specific. For example, explain why EPA does not need the data in a specific question(s). Review the justification for why EPA requested the information and how the data element will be used in the analysis. Then, if possible, provide alternative data sources and/or modeling approaches that EPA should use instead to conduct its analysis. In addition, consider the availability and implications of alternative data sources. For example, EPA is not able to access IRS data or disaggregate USDA data (which is confidential). Thus, merely suggesting that EPA use information already provided to the federal government when EPA does not have access to that data would not be a particularly useful recommendation, and would not likely persuade us to eliminate the question. Finally, if commentors recommend alternatives to the complete draft questionnaire, they are essentially stating that they prefer their alternative data and/or analytical approach over the detailed farm-level analysis described below.

Even though we have outlined a preferred analytical approach, we remain receptive to comments and in many ways, we are still in the planning stage of the economic analysis. The types of economic analyses that can be performed, however, depend on the underlying data. At this time, EPA is considering three data scenarios: (1) having farm-level data on all or most of the economic and financial questions from the draft questionnaire; (2) having farm-level data on a very limited number of questions; or (3) having no farm-specific data and relying solely on publicly available information. The remainder of this letter will explain how each option would direct the economic analyses conducted by the Agency. The final economic impact analysis will contain many different components; however, the following discussion will focus exclusively on how the Agency could examine the direct impacts at both the individual farm level and the industry level. While EPA's analysis will apply to both public (e.g. Federal hatcheries) and private facilities, the following issues are most relevant to private facilities.

Detailed farm-level data on all or most of the financial questions. The draft questionnaire was designed to provide EPA with the most current, complete data on the industry for the analyses. The depth of information gathered in the survey allows the Agency to examine a broad range of potential impacts. EPA develops incremental compliance cost estimates, based on equipment and best management practices already in place, for each farm/facility to meet each of the regulatory options being considered. The analysis then compares farm-specific costs of compliance to farm financial data. At an extreme, pollution control costs associated with an option might be so large that a facility would choose to close or cease operations rather than incur the compliance costs. For effluent guidelines, EPA usually estimates the likelihood of facility closures and also estimates financial impacts that are less severe than closure. To estimate potential closures, EPA generally uses a standard financial decision model, which predicts closure if the net income changes from positive to negative after incurring pollution control costs.

A survey provides EPA with matched pairs of real costs and revenues for real individual farms, thus providing the most accurate way to construct the estimates necessary for the closure model and analysis. This approach also allows the Agency to see the entire range of projected financial impacts across the industry. The income statement and balance sheet data also enable EPA to examine a number of financial ratios that measure the changes in a facility's liquidity (current ratio), solvency (debt/assets, typically used by USDA), and profitability (return on assets and return on equity) after incurring any incremental compliance costs. EPA can also calculate cost ratios, such as the incremental compliance cost to sales or the incremental compliance cost to existing costs to evaluate impacts. Other impacts, such as losses in production, losses in revenue, and losses in employment are calculated directly from the closure analysis and corresponding farm-level data.

The survey data also provide the most accurate way to identify farms that are small businesses (defined by the Small Business Administration in terms of annual revenues for aquaculture facilities) and analyze impacts to them separately. This small business analysis is used to determine whether EPA needs to consider exclusions or alternate requirements to lessen the impacts on small entities.

EPA also examines the impacts on firms that may own more than one farm/facility and on the industry as a whole. The analysis is tailored to the characteristics of the industry being examined and data availability. EPA may examine impacts on firm profitability, impacts on product prices, and impacts on the industry's competitive position - both nationally and internationally.

Detailed farm-level data on a limited number of the financial questions. Depending on public comments, EPA might eliminate some of the detailed economic and financial questions. In general, reducing the amount of survey data reduces either the depth or precision of the analysis that can be performed. For example, eliminating the detailed revenue questions would mean that matched data pairs of revenues and costs would no longer be available for each farm. EPA would estimate revenues based on the quantity produced and average price for each commodity. Because using average prices overestimates the revenues of an individual farm that receives less than the average price for its goods and underestimates the revenues of a farm that receives higher than average price, EPA would conduct sensitivity analyses to evaluate the effects of this uncertainty in the economic impact analysis. EPA would still examine the effects of incremental compliance costs on each farm/facility, firm, and the industry; however the alternative facility closure analysis would be based on revenue estimates rather than actual observations.

Eliminating questions would limit the financial ratios that EPA could examine to evaluate impacts. Without revenue data, EPA cannot examine changes in profitability ratios, and changes in liquidity and solvency ratios would be difficult to interpret in terms of impacts without these profitability changes to put them in context. Without balance sheet information (assets and liabilities), EPA cannot examine changes in liquidity and solvency ratios which may supply important supplemental information to the profitability analysis.

Relying solely on publicly available information. If EPA receives extensive comments justifying the elimination of all economic and financial questions and is persuaded that there is no acceptable subset of questions, EPA may consider an alternative approach that relies solely on publicly available data and information. The Agency believes this to be a sound approach when there are sufficient public data to construct both representative model facilities and a statistical distribution of those facilities to allow estimation of the number of facilities that would be affected and how many of those affected are considered small businesses. The Agency is using this type of approach for the economic analysis of the proposed concentrated animal feeding operations regulations. Specifically, EPA is using a representative farm approach using readily available data from the U.S. Department of Agriculture (USDA) broken out by key data variables such as commodity sector (e.g. hogs), farm size, and production region. USDA has developed extensive historical data sources that are useful to EPA's analysis, including full financial information (income statement and balance sheet data) for select representative farms. That is, matched pairs of revenue and cost data and financial ratios are available in an aggregate form.

USDA performed the 1998 Census of Aquaculture specifically because of the lack of data available on the industry. Even so, the 1998 Census does not have the in-depth financial information necessary to conduct an economic impact analysis for the proposed rule. While the revenue data it provides could be useful, it does not contain corresponding cost data to create matched observations or any representative balance sheet information. In this case, it is unlikely that EPA would be able to perform a facility closure analysis. EPA's impact analysis would consist of examining the changes to a limited number of financial ratios, and these ratios would be based on constructed models of representative farms.

While EPA will use whatever financial information is publicly available for aquaculture firms, most operations are privately held and do not file financial reports with the Securities and Exchange Commission (SEC). For this rule, a representative farm approach would rely on the 1998 Aquaculture Census data, available enterprise budgets, and the academic literature to develop the data inputs for the analysis. The enterprise budget is a process of estimating costs and returns for a particular kind of crop or animal, or a unique combination of the two. It is a statement of what is generally expected from using particular production practices to produce a specified amount of product. In actuality, there would be a range of profitability among individual farmers depending on each operation's specific circumstances. Enterprise budgets can be organized and presented in several different formats, but they generally include sections on income, variable costs, and fixed costs. It is likely that EPA would have to develop enterprise budgets for some species and aquaculture practices; the number would depend on how the industry is subcategorized and the need to capture regional cost differences.

In conclusion, EPA believes that the detailed financial data from the draft questionnaire would provide the Agency with the best data set to conduct an in-depth analysis of all of the potential impacts. Specifically, the data would enable a comprehensive facility closure analysis and a thorough financial ratio analysis. Pending further stakeholder comment, the Agency is not convinced that an alternative approach based on publicly available data is in the best interest of individual fish farmers due to concerns regarding the depth and representatives of such data. Regardless of the analytical approach, we will work closely with AETF's Economics Subgroup to identify and address issues of concern, such as accounting for opportunity costs of labor and management.

Please let me know if there is any additional information that I can provide at this time. I look forward to continuing to work with you and other AETF members as we continue this process.

Sincerely,


/s/
Kristen L. Strellec
Economist, Engineering and Analysis Division


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