If pay-as-bid auctions are not a solution for California, then why not a reliability market?

Electricity Journal

Volumn 14, Issue 4, 2001, Pages 41-48

  Vázquez, Carlos ^b   Rivier, Michel ^a   Pérez Arriaga, Ignacio J ^b  

^a ICAI's Department of Electrical Engineering   (Spain)

^b Department of Electrical Engineering and Founder and Director ^*

Author keywords

[No Author keywords available]

Indexed keywords

CALIFORNIA; COLOMBIA; ELECTRICITY GENERATORS; MARKET POWER; PAY-AS-BID AUCTION; POWER PROBLEM; REGULATORY COMMISSION;

COMMERCE;

EID: 0037834401     PISSN: 10406190     EISSN: None     Source Type: Journal    
DOI: 10.1016/S1040-6190(01)00196-8     Document Type: Article

References (13)

1. Federal Energy Regulatory Commission, Order proposing remedies for California wholesale electric markets, Nov. 1, 2000.
2. Symmetrically, generators would like consumers to pay the price in their offers instead of just paying the uniform market price, which is much lower.
3. See, for instance, M.C. Caramanis, Investment Decisions and Long-Term Planning under Electrical Spot Pricing, IEEE TRANS. ON POWER APPARATUS AND SYSTEMS, Dec. 1982;
4. and Ignacio J. Pérez-Arriaga and C. Meseguer, Wholesale Marginal Prices in Competitive Generation Markets, IEEE TRANS. ON POWER SYSTEMS, May 1997.
5. See, for instance, P.D. Klemperer, Auction Theory: A Guide to the Literature, J. ECON. SURVEYS, July 1999.
6. It has to be noted that there are an important number of auction theory developments that move in the opposite direction, trying to diminish risk. For example, the second-price Vickrey auction was designed to avoid the need to make assumptions about other bidders' behavior and eliminate the problems associated with imprecise estimations. See William Vickrey, Counterspeculation, Auctions, and Competitive Sealed Tenders, J. FIN., 16 (1961), at 8-37.
7. This is also true with no market power.
8. Regarding some other proposals made in this context, we would like to point to the benefits of having a central clearinghouse for electricity trading. (See Larry Ruff, New Electricity Trading Agreements for England and Wales: A Comment by NERA on OFGEM's Proposals, NERA Energy Regulation Brief No. 2, Aug. 1999, for an enthusiastic defense of this point.) In a competitive market, having several different power exchanges is not a problem because they would tend to compete with each other and, since there are economies for market participants in negotiating through a larger clearinghouse, only one or a few of them would survive. But if there is some kind of market power, a diversity of power exchanges may exacerbate the problem; oligopolists may use it as an additional tool to exercise their dominant position, specially through market segmentation. This would lead to a situation similar to vertical concentration, which is highly undesirable.
9. See, for instance, Michael Kahn (Chairman, Electricity Oversight Board) and Loretta Lynch (President, California Public Utilities Commission), California's Electricity Options and Challenges: Report to the Governor, Aug. 2000.
10. Supra note 3.
11. Note that the need is not for consumers to demand less energy from the market when prices are high - the typical goal of demand - side management programs - but to have them sign efficient hedging contracts to express their need for a higher level of generation reliability (i.e., to express their risk aversion).
12. See the research report by Michel Rivier, Carlos Vazquez, J. C. Enamorado, and Ignacio J. Perez-Arriaga, Capacity Charges in Colombia (in Spanish), prepared by Institute) de Investigacion Tecnologica (IIT) for the Association of Electricity Generators of Colombia (ACOLGEN), May 2000.
13. See also Carlos Vazquez, Michel Rivier, and Ignacio J. Perez-Arriaga, A Market Approach to Long-Term Security of Supply, IIT Working Paper IIT-00-0078-A, March 2001, http://www.iit.upco.es (April 24, 2001).