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Recommending a Strategy

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					PX Activity Rules

  Robert Wilson

  Presentation to PX Team, 2/10/97
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
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
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
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
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
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
Example                   (Only supply side shown)

                                        Next iteration’s
                                        offers must beat
Price                                   this price
                   Demand
Clearing
Price P
              Offered Supply                     These offers
                                                 are frozen
                                                 -- until price
           These offers                          rises above
           can remain          True
                               Supply            P later
           unchanged
                                              Quantity
                                                             8
Example                                   (continued)
                     Now these offers become
                     extramarginal - so next offers
                     must beat new clearing price
Price
                Demand
New                                                   True
Clearing                                              Supply
Price
           Offered
           Supply
                            Required Price
                            Decrement
                                             Quantity
                                                               9
 Typical Configuration
                         Offered Supply
      Bid-In Demand   Rationed Buyers
                      Must beat MCP
                      in next iteration --
MCP                   or be frozen


                             True Demand




                                             10
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
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
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
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
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
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
Bidding Strategy (Thermal Unit)
                           Time Frame:
                   Price   Day [Start-up Cost]
                   $/MWh   Hour [No-load Cost]
PD: Shutdown               Minute [Running Cost]
Price for the day
- depends on no.
  of running hours
                    PD          Marginal or Avg. Cost
                    PH          of energy | time
PH: Shutdown
Price for this hour             frame
- if initial or final            - Day
  hour in sequence               - Hour
                                 - Minute     Qty
                                                   17
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
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
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

				
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