2.1.06

REVEALING YOUR RESERVATION PRICES. In October, I had to do some quick research on reverse auctions in order to help the university radio station with a story. At that time, I had some reservations about coming up with a uniform price for each slice of a power company's load, suggesting that some base load producers would be making a lot of money. The metaphor I used was that the base load producers would be paid as if they were making a combination pizza with pineapples, Canadian bacon, and mushrooms when they were simply making cheese pizzas.

The reality might be worse than that. Lynne at Knowledge Problem reads Arthur Laffer and Patrick Giordano, who are thinking along similar lines.
In ComEd's proposal the auction is halted at the so-called market-clearing price and all sellers receive that same uniform price--even those suppliers, like Exelon Generation, that might have been willing to sell at lower prices because their generation costs are very low.
But the experimental research she has done with alternatives to uniform-price auctions introduces a different set of problems.
But we have decades of field and experimental data to show that pay-as-bid/pay-as-offer auctions induce participants to misrepresent their true values. Think about it: if you know that you are going to receive exactly what you offer, are you going to offer at your marginal cost? Heck no! You are going to shade your offer upward. In experiments ranging from Treasury bond auctions to wholesale power markets, there's a four-decade-long experimental literature exploring the intricacies of uniform vs. pay-as-bid auctions, and in general uniform price auctions are more efficient, although whether the buyers or the sellers benefit more depends on the application.
In the wholesale power market, however, there might be ways of holding more than one uniform price auction (for example, some number of megawatts to be delivered continuously over the duration of the contract, some number of megawatts to be delivered from an hour before sunrise to an hour after sunset in the summer, some megawatts to be made available as a reserve.) That strikes me as a more logical way to preclude Edison from funneling money to its parent company, Exelon.

While I'm on this subject, a quibble. Messrs. Laffer and Giordano raise this objection, which I have heard raised locally, to the entire reverse-auction power market.
ComEd's proposal is particularly objectionable in Illinois because utility consumers long ago paid to build the nuclear plants now owned by Exelon Generation.
What ever happened to the sunk cost fallacy? The efficient price for, to use my illustration, continuous delivery of electricity from continuously-turning power plants, whether nuclear or other, is a price at which an investor will replace existing capacity as it wears out. Whether Edison has or has not retired the bonds to pay for the existing nuclear plants (or, for that matter, the Insull-era coal plants) is irrelevant. Whether Exelon, or somebody else, can replace that base capacity as it wears out is most relevant.

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