1 ANALYSIS OF UNIFORM AND DISCRIMINATORY PRICE AUCTIONS IN RESTRUCTURED ELECTRICITY MARKETS*Randy Hudson Energy Division Oak Ridge National Laboratory†Oak Ridge, Tennessee Abstract The settlement rule used to determine payments in electricity market auctions can have a profound impact on the amount paid for a particular service. This paper evaluates two auction settlement rules: the uniform price auction in which the last offer accepted determines the price paid to all participants and the discriminatory price auction in which each participant is paid the amount bid by that party. Using an electricity market simulation tool to model the markets for energy and various ancillary services in a large control area, it is demonstrated that under conditions of market power substantial revenues with commensurately high profits can be commanded under a uniform price auction. By employing a discriminatory price rule, much of the impact of market power can be ameliorated. In addition, a discriminatory price auction, by virtue of requiring each bidder to explicitly state their desired revenue rate, provides greater visibility of attempts to make use of strategic pricing and market power. By discouraging the use of market power through greater price visibility, discriminatory price auctions also have the potential to reduce instances of strategic capacity withholding, which in turn, should enhance overall system reliability. 1. Introduction Nearly twenty-five years ago, the movement to increase competition in electricity supply began on a large scale with the Public Utility Regulatory Policies Act of 1978. The Act required regulated utility companies to purchase non-utility generation from “qualifying facilities” at the utility’s marginal cost. Later regulations, including the Energy Policy Act of 1992 and FERC Orders 888 and 889 in 1996, gave independent generators greater access to the bulk transmission system. Complementing the Federal activities, a number of states, notably California and many of the Northeastern states, have exercised their regulatory authority to open the electricity generation function to market-based competition. The results thus far of market-based pricing for wholesale generation have been somewhat mixed. A frequent problem in the wholesale marketplace has been price spikes that occur, generally, when the system is under demand stress. Demand stress can be *Coordinated by the Consortium for Electric Reliability Technology Solutions (CERTS) under sponsorship of the Office of Energy Efficiency and Renewable Energy, U.S. Department of Energy, Washington, D.C. †Oak Ridge National Laboratory is managed by UT-Battelle, LLC, for the U.S. Department of Energy.
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