[Federal Register Volume 61, Number 110 (Thursday, June 6, 1996)]
[Proposed Rules]
[Pages 28996-28998]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-14112]




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Part IV





Environmental Protection Agency





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40 CFR Part 73



Acid Rain Program, SO2 Allowance Auction and Electronic Allowance 
Transfer; Advanced Notice of Proposed Rulemaking

  Federal Register / Vol. 61, No. 110 / Thursday, June 6, 1996 / 
Proposed Rules  

[[Page 28996]]



ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 73

[FRL-5513-6]
RIN 2060-AG75


Acid Rain Program, SO2 Allowance Auction and Electronic 
Allowance Transfer

AGENCY: Environmental Protection Agency (EPA).

ACTION: Advanced notice of proposed rulemaking; notice and request for 
comment.

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SUMMARY: Title IV of the Clean Air Act, as amended by the Clean Air Act 
Amendments of 1990, (the Act) authorized the Environmental Protection 
Agency (EPA or Agency) to establish the Acid Rain Program to reduce the 
adverse health and ecological effects of acidic deposition. Under the 
Acid Rain Program, electric utilities must have an allowance for each 
ton of sulfur dioxide (SO2) that their generating facilities emit.
    Title IV mandates that EPA hold or sponsor yearly auctions and 
direct sales of allowances for a small portion of the total allowances 
allocated each year. The United States General Accounting Office has 
recommended that EPA change the design of the auction to a single-price 
auction, in which each bidder would pay the market-clearing price. 
Currently, the auction is a ``price-discriminating'' auction, meaning 
that all bids are ranked beginning with the highest dollar amount and 
that each winning bidder pays what he or she bids until all allowances 
are sold. EPA is soliciting comments on whether to change the current 
design of the acid rain allowance auctions. EPA is also seeking comment 
on whether to change the requirement that additional allowances offered 
in EPA auctions have a set minimum price in whole dollars. Lastly, EPA 
is seeking comment on whether to change the timing of the annual 
auctions from late March to late October.
    Title IV also provides for the transfer of allowances and states 
that a transfer will not be effective until EPA receives and records a 
written certification of the transfer signed by a responsible official 
of each party. EPA is considering development of a system to allow 
electronic submittal of allowance transfers. EPA is seeking comment on 
whether to propose allowing such electronic transfers.

DATES: Comments must be received on or before August 5, 1996.

ADDRESSES: All written comments must be identified with the appropriate 
docket number (Docket No. A-96-19) and be submitted in duplicate to: 
EPA Air Docket Section (6102), U. S. Environmental Protection Agency, 
Waterside Mall, Room M1500, 1st floor, 401 M Street SW., Washington, DC 
20460.

FOR FURTHER INFORMATION CONTACT: Linda Reidt Critchfield, U. S. 
Environmental Protection Agency, Acid Rain Division (6204J), 401 M 
Street SW., Washington, D.C. (202) 233-9087, call the Acid Rain Hotline 
at (202) 233-9620, or visit the Acid Rain Program web page at http://
www.epa.gov/docs/acidrain/ardhome.html.

SUPPLEMENTARY INFORMATION: EPA's Acid Rain Program established an 
innovative, market-based allowance trading system to reduce SO2 
emissions, one of the primary precursors of acid rain. Under this 
system, fossil fuel-fired power plants, the principal emitters of 
SO2, were allocated tradeable allowances based on their past fuel 
usage and emissions. Each allowance entitles a unit to emit 1 ton of 
SO2 during or after the year specified in the allowance serial 
number. At the end of the year, the number of allowances a unit holds 
must equal or exceed total emissions at that unit; otherwise, stringent 
penalties will apply. After the year 2000, the total number of 
allowances allocated each year will be about half of what the utility 
industry emitted in 1980.
    Allowances may be bought, sold, or banked like any other commodity. 
If a unit has surplus allowances, it may sell them to units whose 
emissions levels exceed their allowance supply, or it may save them for 
future years.

Allowance Auctions

    Because the availability of allowances is crucial to ensure the 
economic efficiency of emissions limitations and facilitate the 
addition of new electric-generating capacity, title IV of the Act 
mandates that EPA hold or sponsor yearly auctions and direct sales of 
allowances for a small portion of the total allowances allocated each 
year. In addition, title IV requires that EPA provide a written 
guarantee ensuring priority for certain new independent power producers 
(IPPs) in purchasing allowances in the direct sales. The auctions, 
sales, and IPP guarantee provisions of title IV help ensure that units, 
including new IPPs, have a public source of allowances beyond those 
allocated initially. Moreover, the auctions, which began in 1993, 
provide price information to the allowance market early in the 
regulatory program, 1995 being the first year in which allowances are 
required to be held.
    To supply the sales and auctions with allowances, EPA has set aside 
in a Special Allowance Reserve 2.8 percent of the total annual 
allowances allocated to all units. During Phase I, when the allowances 
allocated total 5.7 million allowances annually, 150,000 allowances are 
available every year for auctions. During Phase II, when allowance 
allocations total 8.95 million allowances annually, 200,000 allowances 
are earmarked annually for auctions and 50,000 designated for the 
direct sales. Private allowance holders (such as utilities or brokers) 
also may offer their allowances for sale at the EPA auctions, provided 
that the allowances are dated for the year in which they are offered, 
for any previous year, or for 7 years in the future.
    The auctions and sales are conducted for EPA by the Chicago Board 
of Trade (CBOT). Section 416 of the Act gives EPA the authority to 
delegate the administration of the auctions and sales.
    EPA is soliciting comments on whether the Agency should propose to 
change the design and timing of the annual acid rain allowance 
auctions. The United States General Accounting Office (GAO) recommended 
changing the design of the auction from a ``price-discriminating'' 
auction to a uniform or single-price auction. See Air Pollution: 
Allowance Trading Offers an Opportunity to Reduce Emissions at Less 
Cost, GAO/RCED-95-30 (December 1994). A price-discriminating auction is 
an auction in which all bids are ranked, beginning with the highest 
dollar amount, and each winning bidder pays what he or she bids until 
all allowances are sold. Such a design produces a range of winning 
prices. In a uniform or single-price auction, bids are ranked the same 
way, but all winning bidders pay only the market-clearing price. The 
market clearing price is the price of the last available allowance that 
is sold.
    Section 416(d)(2) of the Act provides that ``the auctioned 
allowances shall be allocated and sold on the basis of bid price, 
starting with the highest-priced bid and continuing until all 
allowances for sale at such auction have been allocated'' 42 U.S.C. 
7651o(d)(2). EPA has interpreted this language to require auction sales 
based on bid price (i.e., a price-discriminating auction where bidders 
pay what they bid) as opposed to auction sales based on a single, 
market-clearing price paid by all of the winning bidders, as proposed 
by the GAO report. 56 FR 23744, 23746 (May 23, 1991) (proposed rule); 
see 56 FR 65592, 65603 (December 17, 1991) (final

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rule). EPA is considering whether the statutory language provides 
flexibility to change to a single-price auction. A single-price auction 
may have the benefit of producing a less confusing price signal for 
utilities participating in each auction since there will be only one 
winning price, the clearing price.
    In the first three auctions, the gap between the average price paid 
(the price utilities received for the sale of their allowances withheld 
for auction) and the market-clearing price has narrowed. In 1993, the 
average price paid in the spot auction was $156 and the market-clearing 
or lowest successful bid was $131. In 1994, the average price paid in 
the spot auction was $159 and the market-clearing price was $150. In 
1995, the average price paid in the spot auction was $132 and the 
market-clearing price was $130. In 1996, the average price paid in the 
spot auction was $68 and the market-clearing price was $66. Therefore, 
over the course of four auctions, the gap between the average spot 
price paid and the market-clearing price has narrowed from $25 in 1993 
to $9 in 1994 and to $2 in 1995 and 1996. This narrowing of the gap may 
indicate that the current format does not impede the market, but the 
Agency would like to receive comments on how the auction design affects 
allowance market participants.
    EPA also is seeking comment on whether the timing of the auctions 
should be changed from ``no later than March 31 of each year'' (40 CFR 
73.70(b)) to no later than October 31 of every year. Aside from price 
discovery, one of the initial purposes of the allowance auctions was to 
provide a source of allowances to new units. In the existing 
regulations, EPA timed the auction to precede the direct sale, which 
begins on June 1 each year (56 FR 65598). This reason for the timing of 
the auction may no longer be applicable. No direct sales have actually 
been made, and EPA is eliminating the direct sale program and the 
related IPP written guarantee. By October 31, new (or existing) units 
will have three quarters of emissions data and therefore will have a 
better idea of their allowance needs for the year and be better able to 
use the auction in planning for program compliance. Furthermore, 
auctions completed by October 31 would allow utilities to freely offer 
their allowances in the auctions and avoid conflicting with the 
transfer restrictions that are imposed after the allowance transfer 
deadline has passed and before the compliance deductions have been 
completed. Sec. 73.50(b)(2).
    EPA would also like comment on whether additional allowances 
offered by utilities to be sold in EPA auctions must have a minimum 
price in whole dollars. Under 40 CFR Sec. 73.70, authorized account 
representatives (AARS) may offer allowances for sale at EPA auctions 
and must notify EPA of their minimum price in whole dollars. All bids 
in previous EPA auctions were required to be in whole dollars. 
Beginning with the March 1996 auction, bids were accepted in increments 
of $0.01. Since bids are now accepted in increments other than whole 
dollars, EPA is seeking comment on whether or not allowance offers 
should also be accepted with unrestricted minimum prices.

Electronic Transfer

    Title IV states that allowance transfers are effective when 
``written certification of the transfer, signed by a responsible 
official of each party to the transfer, is received and recorded by'' 
EPA. 42 U.S.C. 7651b(b). Accordingly, EPA's current regulations require 
that, to record an allowance transfer with EPA, parties must submit an 
Allowance Transfer Form that includes ``signatures of the authorized 
account representatives [AARS] of both the transferor and transferee 
accounts.'' 40 CFR 73.50(b)(1)(ii). An Allowance Transfer Form also 
lists the serial numbers of the allowances to be transferred. Once a 
complete Allowance Transfer Form is submitted to the EPA, EPA records 
the transfer in the Allowance Tracking System within 5 business days if 
the transfer meets all applicable requirements.
    In order to facilitate ``the orderly and competitive functioning of 
the allowance system'' (42 U.S.C. 7651b(c)), EPA is investigating 
methods for electronic submission of allowance transfers. This would 
eliminate the need to mail the transfer forms between AARs and then to 
EPA, allowing the transfer to be recorded more quickly and saving money 
for the buyer and the seller. The most straightforward option for 
submitting an electronic transfer is to allow the seller to submit the 
transfer information. If allowances are transferred to the wrong 
account or the incorrect number of allowances are transferred to the 
correct buyer, these errors would be corrected through EPA's normal 
error correction procedure. Another option is to have both the buyer 
and seller submit transfer forms, and if the transfer information on 
the forms matches perfectly, EPA processes the transfer. This raises a 
potential problem if there are the slightest differences in the 
transfer information on the two forms, since the computer will reject 
the transfer. A third option is to have the seller submit the transfer 
form to EPA and have the buyer approve it prior to processing by EPA. 
This option may be more difficult to implement using existing software 
that has been developed for transferring information electronically, 
since that software does not provide ``signoff'' capability.
    EPA is interested in learning whether participants in the allowance 
market would like to forego the requirement that both AARs ``sign'' a 
single transfer form in order to implement the electronic transfer 
capability. Comment is also requested on the three options described 
above and any other options and how such options can be implemented 
consistent with statutory requirements.
* * * * *
    All written comments will be considered carefully in determining 
whether a subsequent proposal to change future auctions and to allow 
for electronic transfers will be prepared.

Administrative Requirements

A. Executive Order 12866

    Under Executive Order 12866, 58 FR 51735 (October 4, 1993), the 
Administrator must determine whether the regulatory action is 
``significant'' and therefore subject to Office of Management and 
Budget (OMB) review and the requirements of the Executive Order. The 
Order defines ``significant regulatory action'' as one that is likely 
to result in a rule that may:
    (1) have an annual effect on the economy of $100 million or more or 
adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local or tribal governments or communities;
    (2) create a serious inconsistency or otherwise interfere with an 
action taken or planned by another agency;
    (3) materially alter the budgetary impact of entitlements, grants, 
user fees, or loan programs or the rights and obligations of recipients 
thereof, or
    (4) raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
the Executive Order.
    Pursuant to the terms of Executive Order 12866, it has been 
determined that this notice is a ``significant regulatory action'' 
because the notice seems to raise novel legal or policy issues. As 
such, this action was submitted to OMB for review. Any written comments 
from OMB to EPA, any written EPA responses to those comments, and any 
changes made in response to OMB suggestions or

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recommendations are included in the docket. The docket is available for 
public inspection at the EPA's Air Docket Section, which is listed in 
the ADDRESSES section of this preamble.

B. Miscellaneous

    Requirements under the Unfunded Mandates Act, Paperwork Reduction 
Act, and Regulatory Flexibility Act will be addressed if and when the 
Agency issues a proposed rule based on the comments received in this 
advanced notice of proposed rulemaking.

    Dated: May 24, 1996.
Carol M. Browner,
Administrator, U.S. Environmental Protection Agency
[FR Doc. 96-14112 Filed 6-5-96; 8:45 am]
BILLING CODE 6560-50-P