Auction Manager: Ohio Should Consider Eliminating Load Cap

The Public Utilities Commission of Ohio should consider eliminating the load cap in the descending clock default service auctions at Duke Energy Ohio, auction manager CRA International said in a report to PUCO.

PUCO had sought reports from the auction manager and the Commission's consultant, Boston Pacific Company, Inc., regarding potential changes to the competitive bidding process, including consolidation of the twice annual procurements into a single procurement, and the use of another procurement method other than descending clock auctions.

Both CRA International and Boston Pacific recommended retaining twice annual procurements, and the use of descending clock auctions.

Both favored the use of two auction events per year in order to minimize ratepayer exposure to short term market conditions. CRA International also conducted a survey showing that three-fourths of bidders prefer two auctions per year versus a single event.

Both consultants also recommended maintaining the use of descending clock auctions, citing the time and expense of devising another procurement method, and due to the lack of stakeholder opposition to descending clock auctions in the electric security plan stipulation. CRA International also said that another procurement method might decrease bidder participation.

The only change recommended by either consultant was CRA International's recommendation to consider elimination of the load cap.

The current Duke Energy Ohio competitive bid process includes an 80% load cap for each procurement auction. A load cap may diversify the supplier base, and supplier diversification may reduce Duke Energy Ohio and ratepayer exposure to default risk, CRA International noted.

"However, forcing supplier diversification via a load cap may lower the competition for one or more products in the auction placing upward pressure on clearing prices. While it is difficult to quantity how much the load cap affects the ultimate clearing prices for an auction, eliminating the load cap may create more competition for tranches and has the potential to lower clearing prices," CRA International said.

CRA International further noted, that in the December 2011 procurement, there were four different winners of the 41 month product, meaning a degree of supplier diversity has already been attained.

"[A]bsent supplier default, there will be at least four different suppliers for the full duration of the ESP period with or without a load cap in future procurements. As a result, given the balance between diversification and competition, conditions may favor eliminating the load cap for future auctions," CRA International said.