United States
Environmental Protection
Agency
Air and Radiation
(ANR-445)
400/1-91/045
December 1991
Auctions, Direct Sales,
and Independent Power
Producers Written
Guarantee Regulations
In May IWl, the U.S. Hnvironmenlal Protection Agency proposed the
Auctions, Direct Sales, and Independent Power Producers (IPP) Written
Guarantee Regulations (Subpart I-, 40 CFR Part 73). In December 1991,
these regulations were promulgated, becoming the first Acid Rain
Program regulations to be implemented under Title IV of the Clean Air
Act Amendments of 1WO. This fact sheet discusses the key components
of these regulations and the role that auctions, sales, and IPP written
set-based allowance trading system.
Introduction
EPA's Acid Rain Program will
establish an innovative, market-
based allowance trading system to
achieve a 10-million-ton reduction in
sulfur dioxide (SOi) emissions, one
of the primary precursors of acid
rain. Under this system, fossil-fuel-
fired power plants, the principal
emitters of SQz, will be allotted trade-
able "allowances" based on theirpast
fuel usage. Each allowance entitles a
unit to emit 1 ton of SOi during or
after the year specified on the
allowance. 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.
Allowances may be bought, sold, or
banked like any other commodity. If a
utility holds surplus allowances, it may
sell them to units whose emissions
levels exceed their allowance supply, or
it may save them for use in future years.
EPA envisions die emergence of an ac-
tive allowance market in the coming
years, where brokers, environmental
groups, and utilities alike will par-
ticipate in allowance transactions.
Because the availability of
allowances is crucial to ensure both
the economic efficiency of the emis-
sions limitation program and the ad-
dition of new electric-generating
capacity, Title IV of the dean Air Act
Amendments 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, Tide IV requires that
EPA provide a written guarantee en-
suring priority for certain new inde-
pendent power producers (IPPs) in
purchasing allowances in the direct
sales. The auctions, sales, and IPP
guarantee provisions of Title IV
should provide some certainty that
units, including new IPPs, will have a
public source of allowances beyond
those allocated initially to existing
units. Moreover, the auctions are ex-
pected to help signal price informa-
tion to the allowance market early in
the regulatory program.
Where Will the
Allowances Come From?
To supply the sales and auctions
with allowances, EPA will set
aside in a Special Allowance Reserve
2.8 percent of the total annual
allowances allocated to all units.
During Phase I, when the allowance
pool will total 5.7 million allowances
annually, 150,000 allowances will be
available every year for auctions and
another 25,000 allowances reserved
for the direct sales. During Phase II,
when allowance pool totals will in-
crease to 8.9 million allowances year-
ly, 200,000 allowances will be
earmarked annually for auctions and
50,000 designated for the direct sales.
1
Private allowance holders (such as
utilities or brokerages) also may offer
their allowances for sale at the EPA
auctions, provided that the
allowances are dated either for the
year in which they are offered, for
any previous year, or for 7 years in
the future. Authorized account rep-
resentatives must notify EPA of their
intent to sell at least 15 business days
prior to an auction. The account rep-
resentatives must specify the number
of allowances they are offering and
their minimum price requirements.
How Will EPA Conduct
Auctions?
A uctions and direct sales com-
jfxmence in 1993 and will be held
each year thereafter. EPA will or-
ganize an allowance auction no later
man March 31 of every year. Auc-
tions will be divided into two seg-
ments: (1) a "spot" allowance
auction, in which allowances will be
sold that can be used in that same
year for compliance purposes, and
(2) an "advance" auction for the sale
of allowances that will become valid
7 years after the transaction date, al-
though they can be traded earlier.
Bidders must send sealed offers con-
taining information on the number
and type ("spot" or "advance") of
allowances desired and the purchase
price to EPA no later than 3 Dusiness
days prior to the auction. Each bid
Printed on Recycled Paper.
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must also include a certified check or
letter of credit for the total bid cost.
EPA will sell allowances from the
Special Allowance Reserve on the
basis of bid price, starting with the
highest-priced bid and continuing
until all allowances have been sold or
the number of bids is exhausted. EPA
may not set a minimum price for
allowances from the Special
Allowance Reserve.
The Agency will sell allowances
from the Special Allowance Reserve
before it begins auctioning off
allowances offered by private
holders. EPA will sell "offered"
allowances in ascending order, start-
ing with the allowances for which
private holders have set the lowest
minimum price requirements. The
Agency wifi sell offered allowances
until the allowance supply is
depleted, bids are used up, or the
minimum price for the next set of
offered allowances exceeds the max-
imum purchase price of the next bid.
EPA will return proceeds and un-
sold allowances from the auctioning
of reserve allowances on a pro rata
basis to those units from wnich the
Agency originally withheld
allowances to create the Special
Allowance Reserve. Proceeds from
the sale of offered allowances will be
returned to private allowance
holders that contributed the
allowances to the auction. EPA will
likewise return payment from unsuc-
cessful bids and allowances from un-
successful offers.
will begin the direct sale of
_jallowances on June 1 of each year
and continue transactions until all
allowances are sold or 10 days before
the allowance transfer deadline,
whichever comes first. During Phase
I, the EPA direct sales will offer only
"advance" allowances (see above).
From the year 2000 onward, organiza-
tions and individuals will also be able
to purchase "spot" allowances at the
direct sales. EPA will offer allowances
for $1,500 each, indexed to inflation.
Any individual or organization
may purchase allowances at EPA-
sponsored direct sales by submitting
the proper application materials,
which specify the number and type
("spot" or "advanced") of allowances
desired. EPA will consider and grant
conditional approval on applications
based on order of receipt. Upon ap-
proval, allowances are reserved
under the name of the applicant. Ap-
proved applicants must tender 50
percent of the total payment within 6
months of the date on which their
request was affirmed by EPA; the
second half must be paid on or before
the allowance transfer deadline. Pay-
ment defaults will result in a
withdrawal of purchase requests by
EPA. The Agency will transfer
allowances only after full payment is
received. In the case that requests ex-
ceed available allowances, ap-
plicants will be placed in a waiting
line on a first-come, first-served
basis. If, by the allowance transfer
deadline, the direct sales reserve has
not been exhausted, the allowances
not sold in the direct sales will be of-
fered at the next year's auctions. Un-
sold "advance" allowances will be
sold at an additional "advance" auc-
tion; unsold "spot" allowances will be
offered in the regular "spot" auction.
Similar to the auction program, EPA
will portion proceeds from the direct sale
of allowances on a pro rata. basis to those
units from which EPA withheld
allowances to create the direct sales
reserve.
Wrttrcen
maintain the total emissions
cap of 8.9 million tons of SO2,
Title IV requires new units (most
units commencing operation after
passage of the Act) to obtain
allowances from existing allowance
holders or through the auctions and
sales programs. New IPPs that can
certify that their efforts to acquire
allowances from affiliate utilities and
all Phase I units have been unsuccess-
ful may be eligible to apply for an IPP
written guarantee. The guarantee es-
tablishes an IPPs prerogative to pur-
chase allowances from the Special
Allowance Reserve for $1,500 before
these allowances are made available to
other parties. Written guarantees are
intended to secure financing to new
IPPs by assuring lenders that new in-
dependent power projects have access
to the allowances needed.
Applicants may request a guaran-
tee for the useful life of the unit, up
to 30 years, beginning in the year
2000. In the application, IPPs must
specify their emissions limitations
and the number of allowances re-
quested. Once EPA approves the ap-
plication, the IPP will be eligible to
purchase allowances (up to the num-
ber stated on the application) from
the direct sale in any year for the
duration of the guarantee, provided
the IPP alerts EPA of its intent to ex-
ercise the guarantee by April 15 in
each year mat direct sales are held. If
direct sales are discontinued, EPA
will still honor the written guaran-
tees and provide new IPPs with
allowances. To continue to hold a
guarantee, holders will need to cer-
tify a continuing need for the guaran-
tee. In addition, EPA can terminate
the guarantee if the IPP does not ful-
fill certain requirements.
E^PA's auctions and sales program
iwill help ease compliance with
the emissions limitations established
under Title IV of the Clean Air Act
Amendments. Agency-sponsored
auctions and direct sales will furnish
utilities and other groups with addi-
tional options for purchasing
allowances, thereby enlarging and
stimulating the allowance trading
market. In addition, giving new IPPs
priority in acquiring allowances
should help to ensure continued
growth in the nation's energy
generation capacity.
too3®
"[Cor more information, write to:
U.S. EPA Office of Air and
Radiation
Acid Rain Division
(ANR-445)
Washington, DC 20460
If you would like to receive other
fact sheets in this series, call the Acid
Rain Hotline at (617) 641-5377 or the
EPA Public Information Center (PIC)
at 202-260-2080.
Fact sheets are available on the fol-
lowing subjects:
o Allowance System
o Continuous Emission
Monitoring
o Environmental Benefits
o Excess Emissions
o Permits
o Proposed Acid Rain Rules
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