Applications of Information Policy Principles from Auction Theory in the Deregulated Electricity Market

Deregulation and restructuring in the energy industry have forced electric utilities that once owned their own generation in a vertically integrated environment into a paradigm where they are securing power for their customers from third party suppliers. Competitive solicitations or requests for proposal (RFPs) for energy and capacity have become prominent vehicles for utilities to secure their power needs from independent power producers (IPPs) and other third-party suppliers in the US and abroad. These are very similar in many respects to sealed bid auctions used in other industries, where qualified bidders submit bids that are only seen by the entity soliciting (e.g., the utility or auctioneer). The success of an RFP is highly dependent on its design components. Information dissemination protocols are just starting to be recognized as a pivotal element in the design of these competitive solicitation processes. While much theoretical work has been done on the proper application of information theory to auctions in other markets and industries, little of this work has focused on these types of electricity markets. This paper outlines the theoretical principles regarding information policies, explains why additional information can improve competitive solicitations for generation by helping to secure the optimal price, and discusses how utilities can apply them to their energy and capacity RFPs.