Hold on to your hats. The vaunted and vilified “standard market design”, once thought dead and buried, has been resuscitated, with all attendant chaos and rhetoric, but this time in the guise of a...
Anatomy of Sealed-Bid Auctions
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per MWh; in this case, the utility can take one, two, or three tranches from this bidder at $85 per MWh.
In contrast, PPL Electric and United Illuminating allow bidders to make multi-tranche offers in which there’s some ability for the bidder to make the provision of one tranche contingent on the utility accepting other tranches. 11 In the case of PPL Electric, bidders are required to submit an offer schedule that indicates the prices and number of tranches they are willing to supply. The offer schedule indicates separate prices for each different number of tranches the bidder offers to supply. Bidders offering more than one tranche must provide separate prices for each number of tranches (from a single tranche to the total number of tranches that the bidder is willing to provide). For example, a bidder offering a maximum of seven tranches must provide separate prices for supplying one, two, three, four, five, and six as well as seven tranches. In the case of United Illuminating, bidders can condition the acceptance of an offer for a particular tranche on the acceptance of different tranches. For example, a bidder can provide different prices for a given tranche depending on whether the utility also purchases a separate indicated tranche or tranches. That is, tranches can be offered separately at individual prices or offered at different prices where the prices are only valid if a given tranche is purchased with another particular tranche.
One variation on sealed-bid auctions that allows bidders to condition the provision of one tranche on the acceptance of other tranches can be found in Connecticut Light & Power’s auction design. Connecticut Light & Power allows bidders to enter bids for tranches and specify the contract terms the bidders would like the utility to consider. 12 For example, if Connecticut Light & Power is evaluating offers for a six-month term ( e.g., the second half of 2008), and three future one-year terms ( e.g., 2009, 2010, and 2011), the utility allows bidders to make offers for any combination of these terms on a per-tranche basis through the submission of separate offers. This structure allows bidders to link the prices for a given tranche across the various time periods. However, this conditioning does not link across offers for different tranches.
Auction designs that allow bidders to condition their offers provide pricing flexibility for bidders. Utilities can benefit from this flexibility because it provides them with additional pricing information and can improve the efficiency of the auction’s results.
• Auction Clearing Methodology : The methods of determining the winning bids, and thus the resulting prices, in these sealed-bid auctions vary considerably. Auction-clearing methodologies range from a simple process of finding the lowest price per tranche to an evaluation that takes into account price and non-price terms. In some instances, the auction clearing methodology is very transparent and easy to understand, while in other instances there’s a degree of judgment exercised in selecting the winning bids.
Generally, the auction clearing methodology focuses on using the prices that bidders offer (via confidential transmission