Request for Information on the State of the Offshore Renewable Energy Industry-Auction Format Information Request (AFIR), 76174-76177 [2011-31222]

Agencies

• DEPARTMENT OF THE INTERIOR
• Bureau of Ocean Energy Management

[Federal Register Volume 76, Number 234 (Tuesday, December 6, 2011)]
[Notices]
[Pages 76174-76177]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-31222]


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DEPARTMENT OF THE INTERIOR

Bureau of Ocean Energy Management

[Docket BOEM-2011-0095]


Request for Information on the State of the Offshore Renewable 
Energy Industry--Auction Format Information Request (AFIR)

AGENCY: Bureau of Ocean Energy Management (BOEM), Interior.

ACTION: Request for information.

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SUMMARY: BOEM invites public comment on a proposed set of auction 
formats which may be used to issue commercial renewable energy leases 
on the Outer Continental Shelf (OCS). BOEM is examining several auction 
formats, each designed to efficiently issue renewable energy leases to 
those who value them most and are best positioned to develop them, 
while also ensuring that the government receives a fair return in 
exchange. BOEM is focusing primarily on variations of Ascending Clock 
Auctions and Package Auctions formats described in more detail below. 
BOEM is also considering a multiple factor auction approach in which 
bidders can earn a discount on their bids submitted under one of the 
auction formats noted above, based on company-specific attributes 
deemed relevant to the success of their projects. The auction format 
selected for each sale area would likely vary based on the actual 
characteristics of that sale. Such characteristics could include the 
size and homogeneity of the area to be offered. BOEM will hold a 
workshop to help familiarize stakeholders with the auction format 
options and to solicit feedback on Friday, December 16, 2011, at the 
South Interior Building in Washington, DC.

DATES: Comments should be submitted electronically or postmarked no 
later than January 20, 2012. All written comments received during the 
comment period will be made available to the public and considered 
during preparation of Proposed Sale Notices (PSN) pertaining to the 
competitive leasing of OCS lands to support the development of offshore 
wind energy resources.

ADDRESSES: Potential auction participants, Federal, state, and local 
government agencies, tribal governments, and other interested parties 
are requested to submit their written comments on the contents of this 
AFIR in one of the following ways:
    1. Electronically: https://www.regulations.gov. In the entry titled 
``Enter Keyword or ID,'' enter BOEM-2011-0095 then click ``search.'' 
Follow the instructions to submit public comments and view supporting 
and related materials available for this document.
    2. Written Comments: In written form, delivered by hand or by mail, 
enclosed in an envelope labeled ``Comments on Offshore Wind AFIR'' to: 
Economics Division, Bureau of Ocean Energy Management, 381 Elden 
Street, MS 4050, Herndon, Virginia 20170-4817.

FOR FURTHER INFORMATION CONTACT: Greg Adams, BOEM Economics Division, 
381 Elden Street, MS 4050, Herndon, Virginia 20170-4817, (703) 787-1537 
or greg.adams@boem.gov; or Wright Frank, BOEM Office of Renewable 
Energy Programs, 381 Elden Street, HM 1328, Herndon, Virginia 20170, 
(703) 787-1325 or wright.frank@boem.gov.

SUPPLEMENTARY INFORMATION:

Authority

    This request for information is published pursuant to subsection 
8(p) of the OCS Lands Act (43 U.S.C. 1337(p)), as amended by section 
388 of the Energy Policy Act of 2005 (EPAct) and the implementing 
regulations at 30 CFR 585.116, which authorize the Director of BOEM to 
solicit information from industry and other relevant stakeholders to 
evaluate the state of the offshore renewable energy industry, including 
economic matters that promote or detract from continued development. 
The information received may be used to evaluate program options to 
promote safe and environmentally responsible development in a manner 
that ensures a fair value for use of the nation's OCS.

Purpose of the AFIR

    The purpose of this information request is to invite public comment 
on the auction format options described in this request. Due to the 
complexities associated with lease valuation and optimal lease 
configurations, renewable energy leasing will require more diverse 
approaches than the sealed-bid, cash bonus approach used to issue 
offshore oil and gas leases.
    The auction formats and their specifications are designed to 
address important program objectives, including:
     Fair Return: BOEM is statutorily required to obtain a 
``fair return'' for leases and grants on the OCS;
     Economic Efficiency: The lease auction process should try 
to ensure that commercial renewable energy leases on the OCS are 
awarded to those who value the areas the most;
     Program Efficiency: The lease auction process must be 
manageable for BOEM to administer;
     Lease Boundary Flexibility: Within constraints fixed by 
BOEM, the auction should allow bidders to identify the optimal lease 
areas;
     Competition: The lease auction process must be fair, and 
encourage participation from all interested bidders;
     Transparency: The lease auction process must be an open 
one in which bids are comparable and the reason why the winners won is 
clear;
     Neutrality: The lease auction process must ensure that all 
bidders are treated equally;
     Simplicity: The lease auction process must be easily 
understood and implemented, by both the bidders and BOEM; and
     Consistency: The lease auction process should be 
applicable to the issuance of leases in a variety of potential 
renewable energy development contexts.
    BOEM contracted with Power Auctions LLC to study auction formats 
for issuing renewable energy leases (hereinafter, ``Ausubel and Cramton 
(2011a), (2011b), and (2011c),'' respectively). Based on its findings 
and BOEM's own internal research, BOEM has identified several 
potentially suitable auction formats. A more comprehensive discussion 
of these auction formats prepared by BOEM staff, along with the Power 
Auctions LLC study, can be found on BOEM's

[[Page 76175]]

Web site at https://www.boem.gov/Renewable-Energy-Program/Regulatory-Information/Renewable-Energy-Auction-Formats.aspx.

Preference for Bidding on the Cash Bonus

    Although BOEM has the authority to conduct an auction with either 
the cash bonus or operating fee rate as the bid variable, the bureau 
generally prefers using the cash bonus. Conducting an auction with the 
bonus bid as the variable has a number of benefits. It allows 
straightforward comparison of competing offers and tends to award 
leases to developers with good financial backing. Because the winning 
bidders would need to pay the bonus bid before the lease is issued, it 
prevents undercapitalized bidders from committing to a greater payment 
than they can afford. Refer to Section 2.3 in Ausubel and Cramton 
(2011a) for further discussion.

Single Lot Auctions: Simple Ascending Clock Auction Format

    In a single lot auction, there is only one object of bidding 
(``lot''), and the entire lease area would be auctioned off as a single 
entity. BOEM could use a single lot auction in situations where it is 
expected that only one lease would be practical for the available 
acreage, because the area would not be large enough to support multiple 
projects.
    In a single lot auction utilizing an ascending clock auction 
format, BOEM would set an initial asking price for the single lot, and 
bidders would indicate whether or not they are interested in bidding 
for that lot at that price. If BOEM received more than one bid, BOEM 
would increase the asking price, which ``ticks'' up like a clock, until 
only a single bidder is willing to meet the announced price. This 
format enables price discovery by the bidders during the auction and 
reduces the guesswork required for bidders to value offshore leases.
    One complication of the simple ascending clock auction is that a 
tie-breaking procedure is needed when all the remaining bidders drop 
out in the same round. Exit bids are one practical way of solving this 
problem in the single lot case. An exit bid allows bidders who are 
unwilling to meet the next round's bid price to specify the maximum 
price they would be willing to pay short of the new asking price. If 
all remaining bidders drop out from one round to the next, the bidder 
with the highest exit bid would prevail. Another tie-breaking procedure 
would be for BOEM to incrementally reduce the current asking price 
until one bidder bids. In either approach, if the tie persists after 
the tie-breaking procedure, the winner could be determined based on a 
random draw. Refer to Section 5.2 in Ausubel and Cramton (2011c) for 
further discussion.

Multiple Lot Auctions: Simultaneous Ascending Clock Auction Format

    In most lease sales, BOEM expects to issue multiple commercial 
renewable energy leases in the same auction. In this case, BOEM is 
considering the use of a Simultaneous Ascending Clock Auction (SACA).
    In such a lease sale, BOEM would divide the entire area offered for 
leasing into smaller lots which would be the objects of the bidding. To 
form the lots, BOEM would likely use OCS lease blocks (approximately 3 
statute miles by 3 statute miles), aliquots (squares 1/16th that size), 
or some combination of these. The auction would enable bidding on all 
of the lots simultaneously.
    BOEM would set a minimum asking price for each lot. Bidders would 
bid on the combination of lots they are interested in at that price. 
The bid price set by BOEM for contested lots (those receiving two or 
more bids) would increase in the next round, while the price for 
uncontested lots (those receiving zero or one bid) would remain the 
same in the next round. BOEM would publish the announced prices and the 
number of bids on each lot at the outset of each round in the auction.
    A lot which is uncontested through several rounds may become 
contested because, as the auction proceeds, a bidder can shift its 
bids, for example, from a contested lot to an uncontested lot. If a 
bidder submits the only bid on a particular lot, the standing price for 
that lot remains unchanged through subsequent rounds until an 
additional bid is submitted on that lot at the standing bid price, or 
the auction ends. As soon as an uncontested lot receives more than one 
bid, it is treated as a contested lot.
    If any bidder finds that it has submitted a bid on a contested lot, 
in the next round that bidder can either:
     Meet the new asking price for this lot;
     Drop its bid for this lot and submit a new bid elsewhere; 
or
     Drop its bid for this lot and not submit a new bid 
elsewhere.
    The auction ends when no lot has more than one bid at the last-
announced asking price set by BOEM. Because any bidder can move a bid 
from a contested lot to another lot, the auction for any particular lot 
is not over until bidding has concluded for all lots. The winning 
bidders are those with active bids in the final round and they are 
obligated to pay the final round prices for the lots they win.
    Bidding in a SACA auction must comply with a set of rules that BOEM 
will include in the Proposed and Final Sale Notices. For example:
     A bidder may only bid on contiguous lots to form a single 
lease.
     Bidders who want to acquire multiple lease areas must 
register for the auction as separate bidding entities.
     Bidders may maintain or reduce the number of lots they bid 
on from one round to the next; but they may not increase the number of 
lots they bid on from one round to the next. This helps to control 
certain opportunities for gaming, and drives the auction towards a 
timely conclusion.
     A ``bid eligibility rule'' would determine the maximum 
number of lots that a bidder is eligible to bid on in the auction in 
the opening round, or in any subsequent round of the auction. Bidders' 
eligibility is based on the amount of money posted as their bid 
deposit. The maximum number of lots that a bidder may bid on equals the 
maximum number of lots that would be covered by the bidder's deposit at 
the opening bid price.
     Bidders may submit an exit bid amount for a particular set 
of lots in any round. An exit bid can only win if the auction ends in 
that round, and there is no higher bid on any of the lots in the set. 
If any of these conditions is not met, the bid is set aside and the 
bidder exits the auction.
    The SACA format provides an opportunity for price discovery like 
the ascending clock auction format used to bid on a single item. Also, 
the SACA format permits a bidder to identify combinations of lots which 
support its particular plan for a commercial offshore wind energy 
project. Refer to Section 5 in Ausubel and Cramton (2011a) for further 
discussion of clock auctions and Section 5.3.5 in Ausubel and Cramton 
(2011c) (Alternative I) for an example of how they work.
    One potential problem with the SACA format arises when multiple 
bidders who have submitted bids on the same lots simultaneously drop 
out of the auction. In this situation, designing and implementing 
tiebreaking rules becomes complex. Under the sample rules described 
above, because bidders may not increase the number of lots on which 
they bid from one round to the next, large and potentially high-value 
areas in the auction area may go unclaimed (hereinafter, 
``undersell''). The difficulty of designing effective exit bidding 
rules for multiple lot auctions limits their potential effectiveness in

[[Page 76176]]

addressing undersell. As a result, it may be a challenge to fully 
achieve program goals such as optimal configuration of the winning sets 
of packages and ensuring receipt of fair value with the SACA format.

Alternative for Multiple Lot Auctions: Package Auctions

    Several variations of the package auction format merit 
consideration for leasing packages of lots for offshore development of 
electricity from wind resources. Below are brief outlines of three such 
package auction variants. More detailed descriptions of these auction 
formats are available on BOEM's web site. A ``package'' is the 
arrangement of lots that a given bidder has selected in a given round 
of bidding paired with the price the bidder is willing to pay in that 
round for that arrangement of lots.
     One variant is a single-phase package clock auction where 
the bidding would proceed just like a SACA. However, BOEM could select 
the best arrangement of packages from earlier rounds of the auction to 
maximize seller revenue, perhaps subject to the condition that the 
prevailing bids in the final round are included in the winning set of 
lots. If the SACA phase of bidding resulted in a significant undersell, 
BOEM could revive early round bids to ``fill in'' undersold areas.
     A second variant builds on the first variation, but allows 
bidders to add a number of additional package bids at the conclusion of 
the SACA phase through a supplemental round of sealed bidding. BOEM 
would then consider all bid configurations from all the SACA rounds and 
the supplemental round in determining the winning set of lots based on 
revenue maximization. Note that any time BOEM proposes a sealed bidding 
round, we would consider using a ``Second Price Rule,'' in which the 
winning bidder would only be required to pay the amount bid by the next 
highest bidder. This prevents a winning bidder from paying more than 
would have been necessary to win. The Second Price Rule can also 
benefit the government by discouraging ``bid shading.'' This happens 
when a bidder bids the amount the bidder thinks will win instead of the 
amount the bidder thinks the lot is worth, in order to avoid 
overpaying.
     A third variant would use a non-clock ascending package 
auction format. In this format, bidders would select packages and also 
name the price they would pay for those packages. In contrast to the 
clock formats, bidders would submit a price at or above the minimum 
required bid increment for their desired package in each round, and the 
set of packages with the greatest auction revenue would become 
provisional winners at the end of each round. The auction would end 
when none of the bids change from one round to the next. BOEM would 
examine all the packages submitted and select the packages that 
maximize revenue.
    For each of the auction formats listed above, BOEM would need to 
determine what information is given to bidders at the outset of each 
round of the auction. For example, bidders could be informed of the 
number of bids for each lot submitted in the previous round. Bidders in 
a clock auction (variations 1 and 2) would also be informed of the 
announced price for each lot, while bidders in a non-clock auction 
(variation 3) would be informed of the aggregate dollar amount of 
active high bids.
    Theoretical work, including the contract study mentioned earlier, 
indicates that a package clock auction with a supplemental bidding 
round is the most effective method for improving auction efficiency. 
However, BOEM is concerned about designing and using this approach in 
initial sales, given its reliance on complex bidding rules and solution 
algorithms, in conjunction with the need to prepare and publish these 
complicated bidding rules in a transparent manner.
    Expanded details on both the clock and non-clock options under 
consideration are available on BOEM's web site, and we encourage 
comments on the more complicated package auction alternatives and their 
appropriateness in early auctions. Refer to Section 6 in Ausubel and 
Cramton (2011a) for an overview of clock auctions and Section 5.3 in 
Ausubel and Cramton (2011c) for a comparison of the package clock 
approaches with examples and further explanation of the rules.

Multiple Factor Auctions

    The auction formats described above in this notice are considered 
sufficient to meet the agency's needs in a wide variety of contexts. 
However, in certain limited circumstances, BOEM may determine that 
other factors, along with cash bids, should be considered in 
determining how it issues leases and, indirectly, how much winning 
bidders should pay. For example, as BOEM noted in publishing its 
regulations in 2009:

    [D]uring the time that [BOEM] has been promulgating this rule, 
the States of Delaware, New Jersey, and Rhode Island have conducted 
competitive processes and have selected companies to develop wind 
resources on the OCS. We believe that the pre-existing State 
processes are relevant to the competitive processes that [BOEM] is 
required to conduct following approval of this rule. We intend to do 
so by using a competitive process that considers, among other 
things, whether a prospective lessee has a power purchase agreement 
or is the certified winner of a competitive process conducted by an 
adjacent State.

74 FR 19,663 (Apr. 29, 2009). Therefore, in certain circumstances, BOEM 
will consider holding ``Multiple Factor Auctions,'' in which non-
financial considerations are taken into account at the outset.
    If BOEM decides to employ such an auction format, it proposes to do 
so in a two-phase auction: A non-monetary phase, followed by a second 
phase using one of the standard auction formats described above. Prior 
to the auction, BOEM would announce the non-monetary factors to be 
considered, and the value assigned to each factor. To ensure a fair and 
transparent process and to ease the task of implementing the auction, 
BOEM would use a limited number of objective, ``yes-no'' factors. 
Examples of such factors could include:
     Do you currently hold a firm financial commitment for the 
sale of at least 100 MW of power from a proposed offshore wind 
development in the lease sale area in the form of either a firm 
purchase power agreement (PPA) that has been approved by the state 
utility commission or its equivalent OR an ocean renewable energy 
credit approved by the appropriate state agency?
     Have you completed installation of a meteorological 
measurement tower on a BOEM limited lease located within the lease sale 
area?
    Each factor would be assigned a percent discount to be applied 
against the amount that winning bidders would be required to pay BOEM 
following the auction. Between the non-monetary phase and the monetary 
phase, each bidder would be informed of the total discount for which it 
qualifies. To encourage competition and balance non-financial and 
financial bidding factors in the auction, BOEM is not likely to offer a 
bidder a discount of more than 25 percent on the basis of non-monetary 
factors. Refer to Ausubel and Cramton (2011b) and Sections 3 and 4 in 
Ausubel and Cramton (2011c) for further evaluation of multiple-factor 
approaches.

Comments and Responses Requested

    BOEM is requesting that the public and any interested or affected 
parties provide specific and detailed comments regarding the auction 
format

[[Page 76177]]

recommendations described herein and in the supporting materials. In 
addition, BOEM is providing the following list of questions to which it 
is seeking substantive responses, including rationales and explanations 
for the answers provided.
    1. How should we configure and size auction lots? Should lots 
generally correspond to an OCS block? What characteristics should BOEM 
take into account when sub-dividing a wind energy area into lots 
represented by OCS blocks or by OCS blocks grouped into zones or 
project areas? Refer to Sections 6.1.1 and 7.1 in Ausubel and Cramton 
(2011c) for discussions of lot designation.
    2. Should the lots auctioned to a single bidder consist of 
contiguous OCS blocks? Refer to Section 6.2.9 in Ausubel and Cramton 
(2011c) for a discussion of the contiguous lots rule.
    3. Should each bidding entity be limited to bidding on a single 
contiguous set of blocks?
    4. What restrictions should be placed on bidders seeking more than 
one package of lots during an auction?
    5. What factors contribute to the size of an area needed to support 
an economically viable offshore wind energy facility? Should there be 
an established rule-of-thumb used to determine the minimum and maximum 
number of OCS blocks needed? Refer to Section 4.4 in Ausubel and 
Cramton (2011c) for a discussion of competition constraints.
    6. At what asking price per block or per acre should BOEM commence 
the auction? In other words, what is an appropriate minimum bid per 
block? At what minimum asking price would you consider not 
participating in the auction? Refer to Section 6.2.6 in Ausubel and 
Cramton (2011c) for a discussion of reserve pricing.
    7. Which of the auction formats discussed and referenced in this 
notice do you prefer BOEM use? Does your answer differ by location? 
Which features of the auction formats would you like to see modified or 
eliminated?
    8. Do the concerns associated with a SACA format (e.g., undersell) 
justify the added complexity of a package auction? Refer to Section 5.3 
in Ausubel and Cramton (2011c) for an example of how undersell occurs.
    9. BOEM is considering using a ``second-pricing rule'' in certain 
specific contexts, including any auction that includes a sealed-bid 
phase. How important is it to you that the auction format includes such 
a second-pricing rule? Would you offer your maximum value as a bid for 
all lots of interest under a second-price auction formulation? Refer to 
Section 5.3.11 in Ausubel and Cramton (2011c) for a discussion of 
winning price determination.
    10. What aspects of the auction formats discussed in this note 
concern you the most? Which features would you like to see retained in 
practice?
    11. What additional factors should BOEM consider in a multiple 
factor auction beyond those enumerated in this Information Request? How 
should all of these factors be weighted? Refer to Section 4.1.3 in 
Ausubel and Cramton (2011b) and Section 3.2 in Ausubel and Cramton 
(2011c) for a discussion of factor design and weighting.
    12. Should lots in desirable locations be weighted differently than 
those of equal size in less desirable locations? Would this potentially 
affect your level of activity during the auction? For example, BOEM 
could adjust rules such that a bidder could expand the number of lots 
bid on if those lots are in an area that BOEM had determined is less 
desirable. This is described further in the materials available on 
BOEM's Web site. Refer to Sections 5.3.8 and 6.2.7 in Ausubel and 
Cramton (2011c) for discussion of such rules.
    13. Are there auction formats not included in this Information 
Request that BOEM should consider?
    Please provide responses to the above questions, and/or any 
comments or suggestions on the auction formats and activity rules 
discussed in this Information Request and referenced in the material at 
BOEM's Web site at https://www.boem.gov/Renewable-Energy-Program/Regulatory-Information/Renewable-Energy-Auction-Formats.aspx.

References

Ausubel, Lawrence M. and Peter Cramton (2011a) ``Auction Design for 
Wind Rights,'' Report to Bureau of Ocean Energy Management.
Ausubel, Lawrence M. and Peter Cramton (2011b) ``Multiple-Factor 
Auction Design for Wind Rights,'' Report to Bureau of Ocean Energy 
Management.
Ausubel, Lawrence M. and Peter Cramton (2011c) ``Comparision of 
Auction Formats for Auctioning Wind Rights,'' Report to Bureau of 
Ocean Energy Management.

    Dated: November 28, 2011.
Tommy P. Beaudreau,
Director, Bureau of Ocean Energy Management.

[FR Doc. 2011-31222 Filed 12-1-11; 4:15 pm]
BILLING CODE 4310-MR-P