PX Activity Rules Robert Wilson Presentation to PX Team, 2/10/97

2 Constraints on the PX Design Uniform price for all transactions PXs net position is nil Suppliers self-schedule operations n So Transaction price = clearing price n Only final iteration is serious n Early price discovery is unreliable n Iterations provide insufficient information for self-scheduling

3 Purpose of Activity Rules n Impose procedural rules that – Enable reliable price discovery – Prevent gaming n Method: Force suppliers to reveal information about costs – Use simple, non-invasive rules that do NOT impair efficiency – Cost-based bidding is NOT affected

4 Construction of Activity Rules n Key Idea is Revealed Preference : Failure to offer price P n Activity Rules require only that: – Suppliers offer prices are consistent with some non-decreasing cost function – Demanders bid prices are consistent with some non-increasing value function

5 Basic Rule (Draconian Version) Supplier cannot offer later a price it declined to offer earlier n Thus: If – Supplier offered $25 in iteration 1 – Clearing price was $20 in iteration 1 Then – Supplier must offer $19 in iteration 2, or Forego later opportunities to offer $19 n Price decrement ($1) is design parameter

6 The Exclusion Rule n A tender is frozen if offered price is above clearing price twice in a row – First clearing price becomes its melt point n Frozen tender cannot revise its price n Frozen tender is thawed if and when clearing price rises above its melt point

7 Motive for Exclusion Rule n Force suppliers to confront irreversible decisions: After failing to meet MCP, either – Beat that same MCP next iteration – Or loose later opportunities (be frozen) unless later MCPs rise as high again.

8 Example (Only supply side shown) Price Quantity Demand Offered Supply True Supply Next iterations offers must beat this price These offers are frozen -- until price rises above P later Clearing Price P These offers can remain unchanged

9 Example (continued) Price Quantity Demand Offered Supply True Supply New Clearing Price Now these offers become extramarginal - so next offers must beat new clearing price Required Price Decrement

10 Typical Configuration Offered Supply Bid-In Demand Rationed Buyers Must beat MCP in next iteration -- or be frozen MCP True Demand

11 The Competitive Process n 1st iteration creates – Inframarginal suppliers: offer price < MCP – Extramarginal suppliers: offer price > MCP n Extramarginal suppliers must, in 2nd iteration, offer price < MCP (or be frozen) n This makes some Inframarginal suppliers Extramarginal -- so, in 3rd iteration they must lower their prices

12 A Standard Set of Rules n Opening Rule: All tenders submitted n Exclusion Rule: Idled tenders cannot offer n Revision Rule: Must beat previous MCP n Withdrawal Rule: Withdrawals irrevocable n Closing Rule: Allow combination tenders n Parameters: - Price decrements by which new offers must beat the previous MCP - Number of iterations - Rationing Rule

13 Withdrawal and Closing Rules n Withdrawals could be revocable if analogous Revealed Preference rule used n Closing Rule could allow final offers of combination tenders for strips of hours with specified revenue requirement

14 Processing Requirements n Any schedule is OK – E.g., Piecewise-linear as in PX Protocol – Activity rules apply to each point separately on the schedule, so bid format irrelevant n Caltech prototype: – Processes 16,000 interval tenders per minute on HP Vectra with 200 MHz CPU – Currently configured for 20 traders on each side of the market

15 Experimental Program (February) n Develop prototype PX market & software n Clarify operational forms of activity rules n Test operation of the rules; check for gaming n Verify convergence and speed of the auction – Establish sensitivity to parameters: * Opening & Rationing & Closing Rules * Price decrements – Check performance with CA mix n Provide hands-on experience for PX Team and TAC members

16 Backstop for 1/1/98 n Schedules submitted only once – No revisions of prices allowed ! n Allow only irrevocable withdrawals – Could be automatic based on submitted revenue requirement n If necessary, exclude withdrawals on demand side – Then clearing prices increase after each withdrawal

17 Bidding Strategy (Thermal Unit) Qty Price $/MWh Time Frame: Day [Start-up Cost] Hour [No-load Cost] Minute [Running Cost] PD PH PH: Shutdown Price for this hour - if initial or final hour in sequence PD: Shutdown Price for the day - depends on no. of running hours Marginal or Avg. Cost of energy | time frame - Day - Hour - Minute

18 Bidding Strategy (Cycling Unit) For a firm that wants to offer costs ! n 1st Iteration: Offer MC schedule in each hour, ignoring fixed-cost components. n Later: Ignore auction and activity rules n Last Iteration: Select best sequence of running hours using no-load costs. Specify extra revenue required for start. n Withdraw from day if revenue insufficient for startup.

19 Bidding Strategies (Continued) n Activity Rules have no effect on suppliers who bid their costs – Purpose of activity rule is only to prevent gaming by others ! n Strategy: Offer MC schedule; then – Withdraw from initial and final hours if hourly fixed cost not covered – Withdraw from day if start-up cost not covered

20 Bidding Strategy (Non-Cost Bidders) n Activity Rule: If your offer > MCP now then next iteration may be your last chance to offer less n So, in next iteration, – Offer < MCP if MC < offer < MCP – Freeze offer if MC > MCP n This will drive high offers down, close to MCP or MC as the auction progresses