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Using Auctions to Jump-Start Competition and Short-Circuit Incumbent Market Power

Fortnightly Magazine - February 1 1999


Another disadvantage of the sealed-bid auction process comes from the difficulty the PUC will encounter when evaluating the various bids. The bids likely will contain a complex mix of customer size and time- and type-of-use prices. This is exemplified by the complex tariffs that comprise the current rate structures utilities have. In addition, there will be many non-price factors to consider, such as reliability. Another problem with the sealed-bid auction is that bidders will not be able to react to other bidders as they could in an open competitive market. This makes the bidding static and somewhat of a "black box" for bidders. Finally, if bidding were statewide where all RMAs are bid at the same time, this could place a heavy burden on the PUC. Breaking the bidding into state regions may relieve some administrative burden, but could lead to an uneven price distribution across the state as the existing capacity is bid and suppliers adapt and learn from each successive bid.

An alternative is an automated, simultaneous multiple-round auction. This is a type of auction mechanism that the FCC has used to assign spectrum licenses in 16 auctions since 1994. This model would allow the simultaneous auction of all of Ohio's RMAs. Bidders would submit bids on one or more RMAs of their choice. There could be a number of price categories, which would be determined in advance, for each RMA that bidders could bid on. (These would parallel price tariffs utilities now have, such as by load size, season, etc.) There would be multiple rounds of open bids so that for each round, all participants would know the best bidder's price and identification.

This multi-round process also would create a more open and dynamic process in which bidders would immediately and actively participate in the auction, make adjustments, learn the results of their bids and tailor responses. Suppliers would be able to take advantage of synergies that would arise from multiple-RMA and price category bids. That is, if a bidder wins one or a group of RMAs, then adjacent RMAs are more valuable to them. They could then more aggressively bid on these adjacent RMAs. Customers would benefit from the fostering of a more transparent and active competitive market that allowed broad and aggressive supplier participation.

Since the basis of selecting the winner will be price only, the qualification of bidders becomes more important than it would be with a sealed-bid auction. Bidders would have to be pre-screened on the basis of financial viability, reliability of capacity and energy and performance guarantees.

A disadvantage of an open auction of this type is that collusion among suppliers is easier and more probable. The PUC would, as the FCC does, monitor the bidding activity, be on the lookout for possible collusion and take action when it does occur. Another disadvantage is that the process, while open, becomes more rigid in terms of evaluating bids since it is based on price only for the specified price categories. Once these customer groups have been established, bids that do not fit the criteria