Re: Bitten by NIMBY, CA power system goes socialist...

Date: Wed Jan 17 2001 - 19:04:16 MST

Chris Hibbert writes:
> I'll start by agreeing that first price auctions aren't unreasonable
> in general. I strongly question whether the variation used in this
> market is appropriate.
> I want to clear up some terminology first. I don't think it's
> appropriate to refer to this as a "first price" auction. You said:
> >> the highest-price rule (also called first-price auction rules).
> As I understand what I've read, there is a continuing auction for
> power throughout the day, which can be treated as a series of
> auctions. If they were first price auctions, then each of the
> auctions throughout the day would be settled at the highest price
> bid. (Second price auctions settle at the price bid by the second
> highest bidder, which reduces the incentives for buyers to exagerate
> their desire for the commodity.)
> In the California power market, (as I understand it) there are a
> series of auctions throughout the day, each one awarding power to the
> highest bidder. At the end of the day, the highest clearing price for
> any of the day's auctions is charged to all the winning bidders. In
> this institution, it's possible for the price someone pays to be
> controlled by auctions in which they didn't participate at all!

I agree that this terminology is somewhat confusing, but it seems to be
used universally to describe the California electronic markets. Documents
linked from
describe the recent analysis and order by the Federal Energy Regulatory
Commision. The press release from 11-01-2000 includes the following orders:

    Single price auctions would be used for all sales in the ISO and
    PX markets at or below $150 per MWh. The single price would be used
    for all load which clears below this amount in the auctions.

    If an auction does not clear below the $150 per MWh level, suppliers
    who choose to bid above $150 would be paid their bid price. This
    mechanism reflects the value of scarce generation capacity in the
    market, but it does not allow sellers to systematically set the
    clearing price for the entire market. In other words, the highest bid
    of the day, if above $150 per MWh, would no longer be the clearing
    price paid by all.

Here, as in all the FERC documents, they call the California auction
a single price auction, but as the last sentence makes clear they are
referring to the highest bid of the day as the clearing price which
everyone pays.

Here is a discussion from the FERC staff report, chapter 5, where again
the California markets are called "single-price":

    Currently, the Cal-ISO and the PX use a single-price rule for
    establishing real time energy prices. That is, the market-clearing
    price (which is based on the highest accepted bid) is paid to all
    accepted sellers, including those who bid less than the price. To
    prevent future price spikes, some have proposed an alternative
    pricing rule paying each accepted seller its bid, rather than the
    market-clearing price. Buyers would then pay a price reflecting the
    average of the accepted sellers' bids. Proponents of the pay-as-bid
    rule argue that consumers would pay less in total during high demand
    periods, on the grounds that consumers would pay less than the highest
    accepted bid to suppliers who bid less. However, generators are not
    likely to bid under a pay-as-bid rule in the same way as under the
    single-price rule. Sellers bidding below the market-clearing price
    will receive that price under the single-price rule, but they will
    receive only their bid under the pay-as-bid rule. So generators
    will generally submit higher bids under a pay-as-bid rule. In sum,
    it is not clear whether a pay-as-bid rule would have the effect of
    lowering consumers' bills.

Here the staff report is making the same argument I did, which is that
changing the auction rules can have unexpected results as the participants
modify their behavior to suit the rules.

In most of the FERC documents there is no explicit mention of the fact
that the time period for the single-price auction is a full day rather
than one hour. The auctions are bid on an hour by hour basis but it
does appear that the "market clearing price" is taken as the maximum
for the whole day, as the FERC press release above mentions.

I agree with Chris's points that this seems to be an odd way of
looking at the electrical market, since the price fluctuates so much
during the day. Obviously the market rules were established through a
political process, but the utility companies who are so harmed by this
rule were important and influential participants. I think there must
be some body of literature which explains why the markets work this way.
I have been looking for some kind of academic analysis of the California
power market which explains this feature, but I have not yet found one.
I'll report further if I can find a better explanation.


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