Uniform Price Algorithm

Introduction

The uniform price algorithm is used for all short-term auctions (day-ahead and within-day). Through this mechanism, the allocation and price of capacity are determined in an open competition among shippers in one bidding round. Shippers bid for a maximum and minimum amount of capacity offering a surcharge. If the sum of all maximum amounts of capacity requested by shippers exceeds the available amount, capacity is allocated giving priority to the shipper(s) who offered the highest surcharge.

General Rules

a.  Shippers place a maximum of ten bids in one bidding round.

b.  In their bids, shippers must set a (1) maximum amount of capacity they wish to buy, a (2) minimum amount of capacity they are willing to buy, and a (3) surcharge they wish to pay.

c. If the total sum of maximum requested capacity from all shippers is lower than or equal to the available capacity, all bidders received the maximum amount of capacity they requested at the regulated tariff.

d. If the total sum of maximum requested capacity from all shippers exceeds the available capacity (overdemand), capacity is allocated giving priority to the highest offered surcharge and setting the price by the lowest offered surcharge that receives capacity.

Case Studies

a. Fill Procedure: capacity is allocated giving priority to the shippers who offered the highest surcharges. The final price is, however, set by the bid with the lowest surcharge that receives capacity.

INITIAL SITUATION:

RESULT:

b. Kill Procedure: Just like in the Fill Procedure, capacity is allocated prioritizing the bids with the highest surcharges and setting the price to the lowest offer that receives capacity. However, in this case, one or more bidders requested a minimum amount of capacity, which exceeds the remaining product amount after the highest bidders got their requests. As a result, these bidders are excluded from allocation and other bidders may take their place. It is, therefore, possible that a uniform price auction will end with a surcharge lower than the one offered by a bidder, who has been excluded from allocation due to their unfulfillable minimum request of capacity.

INITIAL SITUATION:

RESULT:

c. Pro-rata Procedure: Just like in the Fill Procedure, capacity is allocated prioritizing the bids with the highest surcharges and setting the price to the lowest offer that receives capacity. In this case, however, after the bidders, who offered the highest surcharge, acquire capacity, two or more bidders offer the same surcharge for the remaining amount. Moreover, their minimum requests are below the total remaining capacity. Therefore, they will receive capacity on a pro-rata basis to avoid discrimination.

INITIAL SITUATION:

FORMULA:

RESULT:

d. Underdemand or clearance: If the total sum of all requested maximum capacity is lower than or equal to the available capacity, the product is allocated at the regulated tariff.

Bundled Products: Competition

In case of a network bifurcation, two bundled products are created and marketed simultaneously in different auctions. 

However, if the maximum capacity of A is lower than the total sum of the capacity of B and C, the two auctions will proceed in competition until the constraint - the amount of possible allocation at A - is resolved.

Procedure

I. INITIAL SITUATION: The total sum of all maximum demands exceeds the overall capacity limit of 100. Therefore, the auctions below are in competition.
II. INTERMEDIATE EVALUATION OF BIDS: First, the auctions are independently evaluated just as in a regular Uniform Price Auction. 

a. In auction AC, Shipper 3 requested more capacity than the amount that remains after Shipper 2 receives its capacity (priority due to higher surcharge). Yet, since there is enough remaining capacity, Shipper 3 is not removed.

III. BID CONSOLIDATION AND RANKING: Then, to resolve the competition, the auctions are simultaneously evaluated.

b. Since Shipper 1 and Shipper 3 have offered the same surcharge and their minimum capacity requests are below the remaining amount, they will receive a pro-rata allocation.

IV. DETERMINATION OF CLEARING PRICE: the clearing price consists in the final surcharge applied on top of the regulated tariff. 

The clearing price of auctions in competition might NOT be the same. For each auction, the price will be either the one established in the intermediate evaluation of bids (step II) when auctions are assessed independently or the one established in the bid consolidation and ranking (step III) when auctions are factored together, depending on which is higher.

So, in general, there are two relevant outcomes which will determine the price: (1) overdemand in an individual auction and (2) overdemand only in the consolidated evaluation.

1. Overdemand in an individual auction: if the total demand of an individual auction is equal to or higher than the internal constraint of that auction and the clearing price in that same auction is higher than the one in the consolidated evaluation of bids, the clearing price will be lowest surcharge offered by any shipper that receives capacity in that individual auction. Which is to say, the consolidation of bids to resolve the overall constraint will not affect the price.

2. Overdemand only in the consolidated evaluation: if the total demand of an individual auction is below the internal constraint, but the total demand of the competition situation is equal to or higher than the overall competition constraint, then the clearing price of the auctions will be determined by the lowest surcharge offered by any shipper that receives capacity across all auctions in the competition.

For instance, consider the following scenario:

• Competition Constraint: 150
• Internal Constraint of Bundle AB: 80
• Internal Constraint of Bundle AC: 100

At these network points, the following auctions take place:

Therefore, the total demand of capacity in the competition situation will be 160 while the overall constraint is 150. 

The consolidation and ranking of bids will turn out as follows:

In this case, there was an overdemand in auction AB and in the consolidation and ranking of bids. In that individual auction, the lowest surcharge offered by any shipper that received capacity was 2 (Shipper Gray). Since that price is higher than the price determined by the consolidated evaluation (1), the clearing price of auction AB will be 2.

Now, there was an underdemand in auction AC, but an overdemand in the consolidation and ranking of bids. In the consolidated evaluation of bids, the lowest surcharge offered by any shipper that received capacity was 1 (Shipper Pink). Since that price is higher than the surcharge established by the individual auction AC (in this case 0), that will be the clearing price paid by the shippers that participated in that auction (Shipper Pink).

Of course, if the total demand of each individual auction were below their internal constraints and, furthermore, the overall demand in the competition situation were also below the competition constraint, no surcharge would be applied beyond the regulated tariff.