The results in Figure 1 and Figure 2 show that Anglo-Dutch auctions can yield competitive price offers to a buyer of capacity options not actively traded at present. When compared to the municipal utility’s undisclosed price benchmarks, the two auctions’ total cost savings (net of auctioneer fees) are over $50,000. The practical usefulness of the auctions is best summarized by an official of the municipal utility who, after the first-time use of the auction to procure an electricity forward contract, observed that “the auction resulted in a savings of about 10 percent, compared with what the muni[cipal utility] normally pays …”10 The same official further remarked “[t]he process worked tremendously for us. I see this as something that is going to catch on. … It’s very good for competition. It’s unmasking the prices and will save us between $500,000 and $1 million annually.”11
The cost savings realized and the practical usefulness acknowledged by the municipal utility lead us to conclude that an Internet-based Anglo-Dutch auction is a cost- and time-efficient platform to implement competitive procurement of capacity options that are not actively traded. This corroborates a similar conclusion made in connection to the procurement of inactively traded forward contracts.12 Hence, we recommend its routine use in electricity procurement by electricity buyers.
1
John L. Jurewitz, California Electricity Debacle: A Guided Tour, Elec. J., May 2002, at 10–29; Frank A. Wolak, Diagnosing the California Electricity Crisis, Elec. J., Aug./Sept. 2003, at 11–37; Robert J. Michaels and Jerry Ellig, Electricity: Price Spikes by Design? Regulation, 1999, 22 (2), at 20–22.
2
Chi-Keung Woo, Rouslan Karimov, and Ira Horowitz, Managing Electricity Procurement Cost and Risk by a Local Distribution Company, Energy Pol., 2004, 32 (5), at 635–645; Chi-Keung Woo, Ira Horowitz, Brian Horii, and Rouslan Karimov, The Efficient Frontier for Spot and Forward Purchases: An Application to Electricity, J. Operational Res. Soc. (forthcoming, 2004).
3
Alexander Eydeland and Krzysztof Wolyniec, Energy and Power Risk Management (Wiley, 2003).
4
Jeremy Bulow and Paul Klemperer, Auctions versus Negotiations, Am. Econ. Rev., 1996, 86 (1), at 180.
5
Lisa J. Cameron, Peter Cramton, and Robert Wilson, Using Auctions to Divest Generation Assets, Elec. J., Dec. 1997, at 22–31.
6
For a discussion on the Anglo-Dutch auction, see Paul Klemperer, What Really Matters in Auction Design, J. Econ. Persp., 2002, 16 (1), at 169–189, and Paul Klemperer, Auctions with Almost Common Values: The ‘Wallet Game’ and its Applications, Euro. Econ. Rev., 1998, 42 (3–5), at 757–769. For the effect of time extension on bidder behavior, see Alvin Roth and Axel Ockenfels, Last-Minute Bidding and the Rules for Ending Second-Price Auctions: Evidence from eBay and Amazon Auctions on the Internet, Am. Econ. Rev. 2002, 92 (4), at 1093–1103.
7
Chi-Keung Woo, Debra Lloyd, Michael Borden, Ron Warrington, and Carmen Baskette, A Robust Internet-Based Auction to Procure Electricity Forwards, Energy, 2004, 29 (1), at 1–11; Chi-Keung Woo, Michael Borden, Ron Warrington, and Winston Cheng, Avoiding Overpriced Risk Management: Exploring the Cyber Auction Alternative, Pub. Util. Fortnightly, 2003, 141 (2), at 30–37.
8
Marginal generation cost estimate ($/MWh) = forward gas price (∼$6/MMBtu) × marginal generation unit’s input requirement (∼10MMBtu/MWh) ∼$60/MWh.
9
Chi-Keung Woo and Roger L. Pupp, Costs of Service Disruptions to Electricity Consumers, Int’l J. Energy, 1992, 17 (2), at 109–126.
10
MegaWatt Daily, Sept. 17, 2002, at 2.
11
Daytona Beach News J., Sept. 17, 2002.
12
Chi-Keung Woo, Debra Lloyd, Michael Borden, Ron Warrington, and Carmen Baskette, supra note 7.
