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Anatomy of Sealed-Bid Auctions

Bringing flexibility and efficiency to energy RFPs.

Fortnightly Magazine - June 2009

of bid sheets, i.e., bids on Excel spreadsheets, to the auctioneer at a pre-specified time) as the primary input for determining winning bidders. Bidders typically are required to pre-qualify in order to submit their bids. Thus, the primary task of the auctioneer is to assemble the bidders’ offers into a format where they easily can be evaluated. In all of these sealed-bid auctions, the bid sheets appear to be structured to facilitate the evaluation of offers and “clear the market.”

In instances where the bid format allows (or requires) prices to be submitted with seasonal and daily variation by customer grouping or rate schedule, the bid sheets are designed to take these prices and convert them into a single price per tranche. Converting prices typically requires the use of various weighting factors that are based on projections of the amount of electrical energy that will be supplied to each customer grouping. 13 Once bids have been converted into single prices per tranche (or tranches) the auction winners can be identified.

Determining the winning bids in these sealed-bid auctions depends on the way the bids are formatted. The utilities in Washington, D.C., and Maryland use a straightforward methodology in which the prices that bidders have offered are ranked from lowest to highest. The winning bids are the lowest-priced bids necessary to provide the supply being solicited. Because these utilities use sealed-bid auctions that specify that bidders must be willing to sell any whole number of tranches up to the total number offered at the single price the bidder offers, the utilities can buy, for example, two tranches of a four-tranche offer, and acquire the exact number of tranches being solicited. 14 In other auctions the analysis necessary to clear the market is not so straightforward.

When bid formats allow for bidders to condition their offers, the auction clearing methodology can become more complicated. For example, Connecticut Light & Power and United Illuminating use bid formats in which bidders can submit offers with, and without, bearing congestion costs. This bid format gives the bidder flexibility, but requires that the auctioneer evaluate more information. In addition, determining the winning bids becomes more complex because these utilities solicit offers for several products with overlapping terms and subsequently decide which products to purchase at any particular time. In the case of United Illuminating, bidders can condition an offer for one tranche of a product with a particular term on the purchase of another offer for a separate tranche of a different product with a different term. Such flexibility creates more dimensions along which the auctioneer must evaluate bids. When the bid format allows bidders to condition their offers, the auction clearing methodology must consider all the possible combinations of offers that can be purchased to meet the utility’s needs to determine what combination best suits the utility.

The auction clearing methodology can involve a certain level of subjectivity. For example, Connecticut Light & Power and United Illuminating reserve the right not to purchase all of the supplies they solicit. Thus, when determining the least costly offers, the