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EPA's Emissions Rule: Reliability at Stake?

SIP Call in a Nutshell
Fortnightly Magazine - August 2000

Trying to compare what might happen to prices in the market today to the future is impossible to do because as you reduce NO x , there is going to be less need for credits and more than likely the price falls in the long-term," he says.

Conversely, Andy Kruger, vice president at Cantor Fitzgerald's Environmental Brokerage Services unit, believes that prices for NO x allowances in the NO x SIP Call program will not go beyond the highs seen in the current NO x market.

"I don't think it will go higher, nor do many of the players that I have spoken to for a number of reasons. First, about cost, people will find ways to control that. [Second], we have a lot more information available now. We have at least a lesson in history," he says.

Kruger explains that the industry's familiarity with environmental cap-and-trade programs such as SO 2 will provide a comfort level for utilities in dealing with cap-and-trade program associated with the NO x SIP Call.

Furthermore, he agrees with Enron's Thode that the market for 2003 will be entirely different from the current NO x allowance cap-and-trade program and thus difficult to compare.

Nevertheless, Kruger says success of the NO x cap-and-trade program will depend on whether utilities, which start with fewer allowances than they require, can cut down their NO x emissions by means such as adapting SCR technology and become a seller.

"If everybody becomes a buyer and no one becomes a seller, you are going to have a problem," he says.

Adds PHB Hagler Bailly's Graves, "You are likely to have fewer allowances for sale, and that creates some concerns [about] how liquid the NO x market will be.

"The real issue is can A comply more than it needs to and create allowances to sell, and can it do that because its marginal cost of compliance is less than B's. And B's alternative is to put on its own equipment," he says.

PHB Hagler Bailly's Eyster explains further. He describes an example in which one generator might have an opportunity to reduce NO x at $1,500 per ton, and another generator has a cost of $6,000 per ton.

"There is a price in between where they could agree that the $6,000 person buys allowances that the other generates, and they are both better off. The one that puts on the $1,500 technology creates allowances beyond what they need, and sells them to the person who doesn't have to spend $6,000."

Eyster says, "What they spend is the allowance price, which would be presumably higher than $1,500 but not all the way to $6,000."

More Lawsuits Ahead?

Although the legal tactics utilities are pursuing in response to the SIP Call quickly are running out, experts says they still can appeal within 90 days to the U.S. Supreme Court, appeal to Congress, or hope that a Bush administration would be more receptive to energy company woes.

"Do we pursue going to the Supreme Court? Do we pursue Congress? There are two lawsuits going on.