28996 Federal Register / Vol. 61, No. 110 / Thursday, June 6, 1996 / Proposed Rules

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.

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 ‘‘pricediscriminating’’ 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 electricgenerating 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 ‘‘pricediscriminating’’ 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
Federal Register / Vol. 61, No. 110 / Thursday, June 6, 1996 / Proposed Rules 28997

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 marketclearing 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 marketclearing 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. § 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 § 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
28998 Federal Register / Vol. 61, No. 110 / Thursday, June 6, 1996 / Proposed Rules

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