Experimental Evidence about the Persistence of High Prices in a Soft-Cap Auction for Electricity

I. Introduction The high prices for electricity in California during the summer of 2000 led to a substantial amount of regulatory and political intervention. Price caps were lowered and the Federal Energy Regulatory Commission (FERC) proposed that a new type of " soft-cap " auction be adopted to replace the uniform price auction. This auction combines a standard uniform price auction with a discriminative auction for offers higher than a specified soft-cap ($150/MWh). All offers to sell generating capacity below the soft-cap are submitted in a uniform price auction and paid a clearing price set to the last (highest) accepted offer. Any capacity offered above the soft-cap needed to meet the load is paid the actual offer in a discriminative price auction. With this structure, high offers above the soft-cap can not set the clearing price for all capacity sold. Nevertheless, high prices persisted during the winter of 2001. As a result, FERC abandoned the soft-cap auction in May, 2001. This paper presents results from four experiments using uniform and soft-cap auctions, with and without price-responsive load. The objective of this paper is to show that it is hard to mitigate high prices in a soft-cap auction when prices are driven above the soft-cap and to demonstrate how price-responsive load is a more effective strategy in uniform price auctions. Both industry professionals and students are used as participants who represent generators in a " smart " market, POWERWEB, which replicates the physical constraints of meeting loads on an electrical grid. The results of earlier experiments conducted with POWERWEB show that both a uniform price auction and a pure discriminative auction can produce average prices fifty percent above competitive levels (Mount et al. 2001). However, the prices for the uniform price auction are more volatile with many price spikes. This is because generators in a uniform price auction tend to submit low offers for large, lower cost units and speculate with or withhold their marginal, high cost units. The resulting offer curve takes the shape of a