Phoenix From The Ashes, Unfortunately

The California Power Exchange will not die. After a year and a half of bankruptcy and the disappearance of anything resembling a market for electric power in California, the PX is still around. This article summarizes the soap operatic nature of its ongoing existence.

The article does one thing that drives me nuts — it complains about the auction design of highest bid going to all suppliers instead of “pay as bid” auction design, where the supplier gets paid its actual bid. A long, long list of theoretical and practical reasons exist why the single-price auction is preferred to the pay as bid auction, not the least of which being that the single-price auction gives suppliers the right long-run incentives to invest in the capital to meet the demand at the equilibrium price. Pay as bid auctions also create incentives for sellers to do what’s called bid shading — if you are a seller and you know you’ll get paid your bid, you have an incentive to say that your bid is higher than your actual marginal cost. That’s inefficient. People who complain about high prices through single-price auctions should think about creating a demand-side to counter supplier market power. Rate caps stifle that response. Grrr.