Uniform Pricing or Pay-as-Bid Pricing: A Dilemma for California and Beyond

Any belief that a shift from uniform to as-bid pricing would provide power purchasers substantial relief from soaring prices is simply mistaken. The immediate consequence of its introduction would be a radical change in bidding behavior that would introduce new inefficiencies, weaken competition in new generation, and impede expansion in capacity. n November 2000, the California Power Exchange appointed a panel to investigate " whether the current rules for determining the market price in the California Power Exchange Day-Ahead market results in a fair and efficient price for electricity in California. " More specifically, the authors of this article were called upon to express an opinion on whether the successful sellers of power in that market should all receive the uniform , market-clearing price (as they were under the Power Exchange rules) or, instead, their several bid prices—that is, the prices at which each offered its energy blocks. Those approaches typically are referred to as " uniform pricing " and " pay-as-bid, " respectively. The timing of the commission proved to be ironic. Inspired by what was almost universally perceived as the progressively unsatisfactory behavior of the several associated deregulated California energy markets—characterized by frequent price spikes in both sum-(NERA). He served as Chairman of the New York Public Service Commission from 1974–77 and of the Civil Aeronautics Board from 1977–78, departing upon passage of the Airline Deregulation Act. Among his recent publications has been Letting Go: Deregulating the Process of Deregulation (1998). He chaired the panel whose report comprised the bulk of this article. and Senior Lecturer in Technology and Policy at the Massachusetts Institute of Technology. He helped develop the theory of spot pricing upon which real-time pricing and marginal-cost pricing of transmission services are based. The authors of this article were brought together by the California Power Exchange to provide expert opinion on the narrow issue of uniform vs. pay-as-bid auction structure. While significant events in California have overtaken the initial purpose of the panel, it is the authors' belief that the logic and conclusions hold widely where there is consideration of use of pay-as-bid structures in electricity markets.