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Anatomy of Sealed-Bid Auctions

Bringing flexibility and efficiency to energy RFPs.

Fortnightly Magazine - June 2009

companies also decide how much supply to purchase. Deciding how much supply to purchase within the context of the sealed-bid auction allows the utilities to determine whether the current solicitation is the best time to make the purchase or whether purchasing in the future would be more beneficial. As a result of the auction clearing methodology that these utilities employ, the decision-making process surrounding the procurement of power is less transparent to the public.

Other auction clearing methodologies more explicitly incorporate non-price criteria. For example, the Maine PUC asks potential bidders to first submit indicative bids that provide the commission with initial information as to bidder’s pricing and potential exceptions to contractual terms and conditions. The Maine PUC then will meet with bidders and negotiate non-price terms and conditions with the goal of learning whether particular terms and conditions push up prices. 15 The Maine PUC then may adjust particular terms and conditions after these negotiations. A short time thereafter, bidders submit final bids.

To determine the winning bids, the Maine PUC evaluates which offers provide the greatest value to customers considering the prices that bidders offered. However, this process can be complicated by the fact that bidders are allowed concomitantly to offer to purchase power entitlements from the very utilities they are offering to supply. Thus, in Maine, identifying the winning bidders may require considering the linkage between the offer to supply power and the offer to purchase power entitlements. The Maine PUC provides procurement reports that provide some insight into how this process works.

Auction Efficiency

The pricing structure that bidders can offer is dictated by the design of each jurisdiction’s sealed-bid auction. In most jurisdictions, the pricing structure prevents suppliers from making conditional bids. A conditional bid is “a bid that is valid only if a specified set of requirements are met, such as package, minimum delivery, or payment require-ment.” 16 Pricing structures that allow suppliers to make conditional bids can increase the efficiency of the auction.

The efficiency that can be gained by allowing bidders to make conditional bids can be illustrated by comparing the pricing structure under RFPs used by utilities in Maryland with the price structure under PPL Electric’s RFP. 17 In Maryland, bidders are asked to submit the maximum number of tranches the bidder is willing to provide and a single price per tranche at which it’s willing provide any number of tranches up to that maximum. For example, a bidder in Maryland might bid to provide a maximum of five tranches for $85 per MWh. The electric utility can purchase any number of tranches—up to five tranches—from this bidder at a price of $85 per MWh. Under the Maryland RFPs, the bidder is unable to condition the price at which it’s willing to provide the first tranche, second tranche, etc.

Thus, with Maryland RFPs, the bidder in this example could issue five separate bids for one tranche each. In this case, the electric utility incrementally would pay for each tranche that it wants to purchase starting with the least expensive. If the first tranche