Using auctions to divest generation assets

Electricity Journal

Volumn 10, Issue 10, 1997, Pages 22-31

  Cameron, Lisa J ^a   Cramton, Peter ^a   Wilson, Robert ^a  

^a NONE

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EID: 0031458512     PISSN: 10406190     EISSN: None     Source Type: Journal    
DOI: 10.1016/S1040-6190(97)80317-X     Document Type: Article

References (14)

1. As long as there are more than one or two potential bidders, auctions typically yield higher prices than negotiation Bulow Jeremy, Klemperer Paul. Auctions vs. Negotiations. AM. ECON. REV. Mar. 1996;180 An auction of several power plants is also likely to yield greater revenues than a spin-off of these same assets. This is because buyers seeking to purchase the assets outright (and thus control their use) would probably be willing to pay more than the market would pay for a non-controlling ownership interest in those same assets (through the purchase of stock).
2. Lesser J., Ainspan M. Using Markets to Value Stranded Costs. ELEC. J. Oct. 1996;66 also provide a useful discussion of why and how auctions should be used to value generation assets.
3. To understand how the winner's curse arises, consider the case where all firms can earn the same profit by winning a particular item, yet each firm has a different guess as to what the true profit will be. The firm with the most optimistic estimate of the value typically wins the auction. However, the winner may lose money on the item if it does not take into account the fact that winning implies it overestimated the value the most.
4. Efficient auctions also ensure that substitute items with fetch similar prices. This implications of efficiency increases bids because it enables purchasers to show their superiors that they did not overbid.
5. In the spectrum auctions, bidders often wanted to win the same frequency in neighboring markets (e.g. Philadelphia, Baltimore and Washington, D.C.).
6. An especially fine codification of auction rules and procedures is Federal Communications Commission, Second Report and order, FCC 94-61 (1994), as well as the Bidders Information Package issued for auctions of broadband spectrum licenses.
7. Cramton Peter, Parece Andrew, Wilson Robert. Auction Design for Standard Offer Service. 1997;Working Paper, Univ. of Maryland.
8. This approach, which requires bidders to establish their financing commitments in advance, may hinder some smaller bidders, but is unlikely to affect major bidders. Alternatively, the seller can accept installment payments for the assets. Installment payments increase the risk of default. However, they attract smaller bidders with limited access to capital markets and therefore may increase sale prices.
9. This discussion assumes that seller participation in the bidding cannot (and on efficiency grounds, should not) be prohibited, since it is unlikely that the state can exclude a seller from joining an alliance with another bidder.
10. In order to maintain transparency, the utility should announce the features of the scoring system in advance and make sure that scoring criteria are objective. For a discussion of the difficulties of using multidimensional auctions to award long-term power purchase contracts, see Cameron Lisa. Limiting Buyer Discretion: Effects on Performance and Price in Long-Term Contract. AM. ECON. REV. 1977.
11. NEES' counsel justifies the use of post-bid negotiation by referring to its use in several auctions for corporate control, including RJR Nabisco and Gulf States Power. In the case of RJR Nabisco, the committee reviewing purchase proposals agreed to reimburse a portion of the top bidder's expenses to prevent it from withdrawing from the process as the other bidder prepared a revised proposal. When Gulf States received two comparable offers from Entergy and Central and South West Corp., it negotiated with both companies for almost a year and used competitive leverage and improving national economic conditions to secure increases in the proposed purchase price.
12. Sealed bidding can maximize revenues when there are ex ante asymmetries among few buyers. (Eric Maskin and John Riley, Asymmetric Auctions (1995) (working paper, UCLA)). In a sealed bid auction, the ex ante dominant bidder may have incentives to bid higher than it would be forced to bid in an ascending bid auction. But without ex ante asymmetries, an ascending bid auction performs better because it reduces the winner's curse.
13. Also, the auctions should award plants based on price-only bids because, as mentioned above, it is difficult to create a scoring system that can accurately monetize non-price features of the bid.
14. By reducing the pool of potential bidders in the first phase of the sale process, utilities hope to minimize dissemination of confidential information obtained by bidders during the due diligence process. However, the benefits of more controlled due diligence process may be outweighed by the cost of reducing the number of competitors in the final auction. Utilities should therefore consider streamlining the due diligence process, while using confidentiality agreements to limit leakage of sensitive information.