UPDATE 3-U.S. EPA auctions SO2 allowances for $79.7 million

(Adds background in last two paragraphs)

NEW YORK, March 27 (Reuters) - The U.S. Environmental Protection Agency auctioned sulfur dioxide allowances for $79.7 million, the federal agency said in a report Tuesday.

The auctions were for 125,000 allowances for 2007 and 125,000 allowances for 2014. Each allowance permits the holder to emit one ton of SO2.

"There were no surprises. The price of the current vintage was neutral. We were trading at $445 before the EPA released the results and the weighted average came in at $444," said Peter Zaborowsky, Managing Director at energy broker Evolution Markets LLC of White Plains, New York.

"The future auction was a bit bullish but that market is more illiquid. There are not a lot of companies that deal in allowances that far out," Zaborowsky noted.

The winning bidders in the spot auction included subsidiaries of Morgan Stanley (MS.N) ($22.2 million), Koch Supply & Trading ($13.4 million), Saracen Energy ($6.8 million), TransAlta Corp. (TA.TO) ($4.5 million), South Carolina Public Service Authority ($3.3 million), Alpha ($2.2 million), Constellation Energy Group Inc. (CEG.N) ($1.1 million) and Merrill Lynch MER.N ($1.1 million).

The winning bidders for the 2014 auction included American Electric Power Co Inc. (AEP.N) ($16.0 million), DTE Energy Co. (DTE.N) ($5.4 million), and Cantor Fitzgerald ($1.8 million).

In the spot 2007 auction, the weighted average price was $444.39 per allowance, with a high bid of $1,120 by an environmental organization and a clearing bid of $433.25. The clearing bid was the lowest successful bid.

In the spot 2013 auction, the weighted average price was $193.35 per allowance, with a high bid of $400 and a clearing bid of $176.

AUCTION HISTORY

The EPA holds the auction each year on the last Monday in March for the current year and seven years out.

The auction helps provide price transparency and ensures that new power plants have a public source of allowances beyond those already allocated to existing units.

A new 500-megawatt coal-fired power plant with scrubbers that remove up to 95 percent of the sulfur from emissions requires about 10,000 SO2 allowances a year.

The EPA takes the proceeds and distributes the money back to the holders of the existing allowances who had a portion of their allowances withheld. The 125,000 in allowances represents about 1.5 percent of the total annual allocations.

The U.S. Congress enacted the Acid Rain Program in 1990. In the first phase of the program, the EPA issued pollution allowances to the 300 or so biggest SO2 emitters, primarily coal-fired power units.

In the second phase in 2000, the EPA issued allowances to the remaining 1,100 coal fired units and 500 or so oil and natural gas-fired units.