3ournal of Regulatory Economics; 2:129-149 (1990) 9 1990 Kluwer Academic Publishers Auctions for PURPA Purchases: A Simulation Study EDWARD P. KAH~ Lawrence Berkeley Laboratory Energy Analysis Program, 1 Cyclotron Road, MS-90-H, Berkeley, CA 94720 MICHAEL H. ROTHKOPF Rutgers University RUTCOR, Rutgers Center for Operations Research, Hill Center for the Mathematical Sciences, New Brunswick, NJ 08903 JOSEPH H. ETO JEAN-MICHEL NATAF Lawrence Berkeley Laboratory Abstract Competition was introduced into the electric utility industry with the passage of the Public Utilities Regulatory Policy Act (PURPA) of 1978. Increasing interest has appeared in structuring the PURPA purchase market into an auction system. This paper addresses the design issues associated with setting up such markets and introduces a simulation model to study them. The simulation analysis is guided by theoretical issues such as the alleged inefficiency of first-price auctions. We find that efficiency concerns raised about first-price auctions turn out to be less important than simple theoretical concerns would suggest. Competition was explicitly introduced in the electric utility industry with the passage of the Public Utilities Regulatory Policy Act (PURPA) of 1978. The act opened the bulk power market to private unregulated producers by requiting utilities to purchase their output under avoided cost tariffs. PURPA also allowed for binding long term contracts. Implementation of PURPA has been studied by Devine, et al. (1987, 85-101). A common experience of states implementing PURPA was to find substantially greater response to long run contract offers than to short-term reviseable tariffs. (See for example New Jersey Board of Public Utilities (1987).) In some cases, the amount of power offered under long term contracts substantiallyexceeded perceived requirements. Increasing interest has appeared at both the state and federal levels in structuring the PURPA purchase market into an auction system. This interest arises from several sources,including dissatisfaction with the administrative process of posting avoided cost prices and a perception that the increasing competitiveness of private power production would create welfare and efficiency benefits (Pfeffer, Lindsay and Associates 1986). Auctions provide a means of rationing the power requirement in the