PX Activity Rules

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

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

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

4. Construction of Activity Rules • Key Idea is “Revealed Preference” : Failure to offer price < P = Evidence that cost > P • Activity Rules require only that: • Supplier’s offer prices are consistent with some non-decreasing cost function • Demander’s bid prices are consistent with some non-increasing value function 4

5. Basic Rule (Draconian Version) • Supplier cannot offer later a price it declined to offer earlier • 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 • Price decrement ($1) is design parameter 5

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

7. Motive for Exclusion Rule • 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. 7

8. Example (Onlysupply side shown) Next iteration’s offers must beat this price Price Demand Clearing Price P These offers are frozen -- until price rises above P later Offered Supply These offers can remain unchanged True Supply Quantity 8

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

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

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

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

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

14. Processing Requirements • 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 • 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 14

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

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

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

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

19. Bidding Strategies (Continued) • Activity Rules have no effect on suppliers who bid their costs • Purpose of activity rule is only to prevent gaming by others ! • 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 19

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