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Strategic Bidding Under Uncertainty: A Binary Expansion Approach

Mario Veiga Pereira, Member, IEEE, Srgio Granville, Member, IEEE, Marcia H. C. Fampa, Rafael Dix, and Luiz Augusto Barroso, Student Member, IEEE

AbstractThis work presents a binary expansion (BE) solution approach to the problem of strategic bidding under uncertainty in short-term electricity markets. The BE scheme is used to transform the products of variables in the nonlinear bidding problem into a mixed integer linear programming formulation, which can be solved by commercially available computational systems. The BE scheme is applicable to pure price, pure quantity, or joint price/quantity bidding models. It is also possible to represent transmission networks, uncertainties (scenarios for price, quantity, plant availability, and load), nancial instruments, capacity reinforcement decisions, and unit commitment. The application of the methodology is illustrated in case studies, with congurations derived from the 80-GW Brazilian system. Index TermsElectricity pool market, market models, mixedinteger linear programming, optimization methods.

NOMENCLATURE . Those that beThe generators are indexed by ; the remaining long to the bidder, agent A, are indexed by . The bids for are generators are indexed by the main decision variables for the strategic bidding problem. (in dollars per They are characterized by prices (in Megawatthours). Megawatthour) and quantities The price and quantity bids for the remaining generators are assumed to be known. They are represented in the bidding and . When scenarios are used to problem as in each scenario are represent uncertainties, the bids for different but are still assumed to be known values. I. INTRODUCTION

ANY countries around the world have implemented reforms in their power sectors, with emphasis on competition and private investment. Although the details of the regulatory frameworks change in each country, their overall organization in most cases follows the same principles, known as the standard model [12]. One of the basic features in the standard model is a short-term electricity market, where energy sales and purchases are settled on an hourly basis. In a simplied way, the short-term market works as follows: 1) At
Manuscript received May 28, 2004. Paper no. TPWRS-00577-2003. M. V. Pereira, S. Granville, and L. A. Barroso are with Power Systems Research, Rio de Janeiro, Brazil (e-mail: psr@psr-inc.com). M. H. C. Fampa is with Instituto de Matemtica/COPPE-Sistemas, Universidade de Federal do Rio de Janeiro, Rio de Janeiro, Brazil (e-mail: fampa@cos.ufrj.br). R. Dix is with Instituto de Matemtica Pura e Aplicada, Rio de Janeiro, Brazil (e-mail: rafadix@impa.br). Digital Object Identier 10.1109/TPWRS.2004.840397

the end of each day, generators and loads submit price and quantity bids for each hour of the following day; 2) an equilibrium process is then simulated, where the settlement price, or spot price, is adjusted until total dispatched generation is equal to total load; and 3) the energy produced by the dispatched generators (consumed by load agents) is remunerated (charged) based on the spot price. The existence of a bid-based dispatch/settlement poses complex technical challenges for both bidders and regulators. For each bidder, the question is how to develop bidding strategies that maximize their expected net revenue. For example, [9] shows that the optimal strategy for a price-taker bidder is to bid the plants variable operating cost. In the case of thermal plants, this strategy would seem straightforward, because the variable costs are (mostly) a function of fuel costs. In the case of hydro plants, however, the situation is far from clear. The reason is that the hydro reservoirs allow the bidder to postpone energy production if future prices are expected to be higher than the current price. As a consequence, the plants variable cost is actually an opportunity cost, which depends on future scenarios of hydrology, load, and, most importantly, on the future production of other generators. The calculation of opportunity costs for hydro plants is a complex stochastic optimization problem, which is usually solved by stochastic dynamic programming techniques [8], [17], [18]. In addition, the cost-based bidding scheme proposed in [9] is optimal only if the bidder has no market power, i.e., is unable to inuence the system spot prices. As it is well known, this assumption may not be true in several situations, for example, in the peak load hours or when transmission constraints are binding. In these cases, bidders will be interested in devising strategies for optimizing their revenues, such as decreasing the quantity offered and/or increasing the price bids. Conversely, regulators will be interested in analyzing such strategic bidding schemes, in order to prevent abuses. The strategic bidding problem is usually formulated as a bilevel optimization problem, which is, in turn, transformed into a nonlinear programming model through the use of KarushKuhnTucker complementarity conditions [10], [11], [19], [20]. Because the resulting problem is highly nonconvex, there has been an intensive search for efcient solution methods, with proposed solution schemes ranging from heuristics to specialized algorithms and specic equilibrium models (see [3], [10], [11], and [14]). Although several efcient approaches have been reported in the literature, it is usually not possible to ensure that the global optimal solution has been found.

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In addition, some approaches cannot be easily extended to incorporate important features, such as transmission constraints or unit commitment. In order to avoid the above difculties, [21] has represented the nonconvex residual demand function in a Cournot scheme by a mixed integer linear programming (MILP) model. This allowed the calculation of the optimal bidding strategy in a single-bus environment, including unit commitment, as illustrated in examples derived from the Spanish system. In turn, [1] also represented the residual demand function by an MILP model, except that it takes uncertainty into account (not considered in [21]), establishing scenarios of residual demand functions for the day-ahead market session. In this case, an increasing price-quantity offer curve is obtained through a MILP whose key element is the residual demand function associated to each scenario. The approach is also illustrated with examples from the Spanish system. In this work, the generators associated to the competitor rms are explicitly modeled, instead of using the residual demand function, and use an alternative MILP formulation, based on a binary expansion (BE) of the decision variables (price and quantity bids). The BE solution approach is exible and applicable to quantity, price, or joint price/quantity bidding models. It is also possible to represent transmission networks (zonal and DC power ow), uncertainties (scenarios for price, quantity, plant availability, and load), nancial instruments, capacity investment decisions, and unit commitment. This work is organized as follows: In Sections II and III, the strategic bidding is formulated as a nonlinear programming problem, and the BE solution approach is described. In Section IV, the modeling of extensions to the BE model is described. The model application is illustrated in Section V, and the conclusions are presented in Section VI.

(2) (3) (4) , are the price/quanwhere tity bids, is the energy produced by generator (in is the load (in Megawatthours). Megawatthours), and Equation (2) represents the load supply and constraints, and (3) and (4) are the generation limits. It is implicitly assumed that , . Associated with the constraints (2)(4) of the ED, there is a is the spot price, i.e., the marset of Lagrange multipliers: is the marginal benginal cost of increasing load supply, and et of increasing generator s quantity bid. B. Generator Net Revenue Each generator receives a gross revenue (in dollars), or operating prot, given by the product of spot price and its energy production . The net revenue of agent A, represented by R, is obtained by deducting the variable operation cost from the total gross revenue (5) where is the variable operation cost of plant (in dollars per Megawatthour). Note that may be different from , which is the bid price. C. Bidding Strategy The objective of Agent A is to obtain the combination of price and quantity bids that maximizes its total net revenue:

II. STRATEGIC BIDDING PROBLEM OVERVIEW For ease of presentation, in this section, a simpler version of the strategic bidding problem is formulated: it is deterministic, with no transmission constraints and no unit commitment, and it is done in one single hour. In Section IV, the incorporation of uncertainties, transmission network, and other extensions is described. A. Economic Dispatch Once the price and quantity bids of the agents are submitted, the market operator (or the independent system operator, depending on the market arrangement) carries out an economic dispatch (ED) to clear the market and determine the spot price and dispatched generation (there is no possibility for an agent to alter his bid after the ED is carried out). The ED is formulated as the following linear problem: (6) subject to for (7)

where is the maximum generation capacity of plant . and the energy production in the The spot price objective function (6) result from the economic dispatch (1)(4), which in turn depends on the price and quantity bids and of agent A (decision variables) as well as on the load and bid prices/quantities of the remaining generators (known values). D. Formulation as a Nonlinear Optimization Problem The strategic bidding problem (6) and (7) is a bilevel optimization problem, which, besides primal variables, uses results from the economic dispatch (1)(4). dual The rst step in solving it is to write the optimality conditions of the ED (second-level problem) as part of its constraints set.

(1) subject to multiplier

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Therefore, besides (7), the following set of constraints, associated to the ED, is added to the strategic bidding problem:

and from (9), (10), and (13), we have (20) (21)

(8) (9) (10) (11) (12) (13) (14) (15) (16) (17) primal-dual equality Equations (8)(10) are the primal (ED) constraints, (11)(13) are the dual problem constraints, and (14)(17) are the complementarity conditions. The optimization problem (6)(17) is nonlinear and nonconvex due to its objective function and constraints, and it is an instance of a mathematical program with equilibrium constraints (MPECs) [16]. MPECs have been widely studied and directly applied to strategic bidding models (see [11]). The difculties posed by MPEC to nonlinear programming algorithms are well known, and a great variety of nonlinear optimization techniques have been applied to these problems in recent years, such as penalty interior point algorithms, algorithms based on the FischerBurmeister penalty functions, and sequential quadratic programming combined with penalty methods (see [2], [6], [10], [14], [16], and [23]). Both [10] and [14] address the strategic bidding problem with transmission constraints, and in [14], a full AC model is considered. The main difculty related to these approaches is that there is no guarantee that a global optimal solution is found (see [11] and [23]), and heuristic procedures are sometimes applied to check optimality. For example, [10] generates a random set of starting points to an interior points method to get condence that a global optimal solution has been achieved. In an attempt to avoid this difculty, some recent approaches consider the use of integer programming to solve MPECs, such as those presented in [1] and [21] and the one presented in this work, that propose a binary representation scheme to deal with problems (6)(17) through a discrete approximation of some continuous decision variables of the problem (appearing in nonlinear terms). One attraction of the binary representation scheme proposed in this work is that auxiliary integer variables are only . This associated to the agent control variables will be important when considering the extension of the formulation to the stochastic case by avoiding the explosion in the number of binary variables. To apply it, it is necessary to express the complementarity constraints in an equivalent form. As for all j, (11) and (12) imply that (18) (19) (23) As each summation term is nonpositive, the complementarity conditions (14)(17) are equivalent to

(22) Rearranging terms and using (8) and (22) is equivalent to the primal-dual equality condition:

all

The nal form of the problem we consider in this work has (6) as the objective function and (7)(13) and (23) as constraints. III. BINARY EXPANSION SCHEME A. Basic Approach The strategic bidding problem is difcult to solve because of and the products of variables in the objective function (6) and ). in constraint (23) ( The proposed solution approach is to transform those products into mixed integer linear expressions. First, the product is eliminated by rewriting it in terms of the other products. For that, the complementarity conditions associated to the optimal solution of problem are used (1)(4): and , which imply (24) Rearranging the terms in (24), we obtain (25) . The basic idea is to approximate Next, we deal with the continuous decision values by a set of discrete values , where for some non. For example, suppose that the plausible negative integer . The values for the bidding decisions are in the range discrete approximation is written as (26) where , and is a binary variable. Expression (26) is called a binary expansion, and it requires binary variables. Multiplying both sides of (26) by and dening a new variable , we obtain (27)

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Equation (27) allows us to replace the product by the linear expression on the right-hand side. In turn, the product is transformed into the following of variables in IF-THEN relation: all if then if then (28)

(41) (42) (43)

Relation (28) is modeled as (29) (30) where G is a scalar value that is large enough for the constraints and , respec(29) and (30) to be relaxed when tively. For example, G could be the generator capacity . . AsNow, we apply the same procedure to the product suming that the plausible bidding range is and applying the binary expansion scheme, we have all all all all all

(44) (45) (46) (47) (48) (49)

(31)

(32) (33) (34) where , is a binary variable, is , and is a some non-negative integer such that scalar value, large enough for the constraints (33) and (34) to be and , respectively. For example, relaxed when could be . Applying the above transformations to (6), (7)(13), and (23), we arrive at the nal BE formulation of the problem

Problem (35)(49) is a mixed linear integer problem, which can be solved by commercial computational systems. Note that the accuracy of the model solution depends directly on the value and . The bigger these values, the more precise the of model will be. However, a trade-off between accuracy and computer time should be taken into account. Also, one can see that, is a power of 2, the set of discrete values for using since is contained in the set of discrete values for using . Then, as the value of is increased, the objective value and . does not decrease. The same is also true for B. Criteria for Selecting the Binary Variables The BE approximation can be applied to either term of a product of variables. In , for example, one could in theory and discretize instead of . The reason for selecting is that they are under the direct control of the bidding agent A, whereas the other variables such as and are the result of an optimization problem associated with the economic dispatch.

IV. MODEL EXTENSIONS In this section, extensions of the BE solution to more complex models, including uncertainty, transmission network, nancial instruments, capacity expansion decisions, and unit commitment, are described. A. Representation of Uncertainties Suppose that the bids from generators and the load are , uncertain and represented by a set of scenarios with probabilities . The risk neutral strategic bidding problem (6) and (7) is then formulated as

(35) subject to (36)

(37)

(38) (50) (39) (40) subject to (51)

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Similarly to the deterministic case, the generation of plant in each scenario and the spot price for that scenario result from the following economic dispatch: (52) subject to multiplier (53) (54) (55) Applying the same variable and constraint transformations as in the deterministic case results in the following mixed integer linear formulation:

B. Transmission Network In this section, the transmission network is incorporated to the strategic bidding model. For notational simplicity, assume that there is only one generator and one load in each network bus and that they are indexed in the same way, i.e., generator is at bus . The transmission-constrained economic dispatch is modeled as (see [17] for details) (71) subject to multiplier (72) (73) (74) all (75)

(56) all subject to (57) is the where indexes the circuits (K number of circuits), sensitivity factor of power ow in circuit with respect to an injection in bus , and is the ow limit in circuit . Problem (71)(76) is the well-known DC power ow approximation. The bus spot prices and the net revenue are calculated as (77) (78) all all all all all (60) (61) (62) (63) (64) As shown in [17], the LP complementarity conditions used in the formulation of the strategic bidding problem are similar to those of the single-bus case (8)(17). The transmission-constrained strategic bidding has the same products of variables ( , , and ) as the single-bus problem, and the BE transformations can be applied directly. The only change is that (25), used to rewrite the product in terms of and , is modied to represent the fact that spot price varies per bus: (79) all all all all all all all all all all (65) (66) (67) (68) (69) (70) C. Financial Instruments In this section, nancial instruments such as forward contracts and options to the bidding model are incorporated. 1) Forward Contracts: Suppose that agent A signed a forward contract for MWh with a unit price of (in dollars per Megawatthour). The net revenue maximization in (6) and (7) becomes (80) subject to (81) The joint optimization of contract amount (assume the is known) and of price/quantity bids in the contract price short-term market introduces a new product of variables , (76)

(58)

all

(59)

all

Both the load and the price/quantity bids of generators may be different in each scenario . However, the decision variables representing price/quantity bids for agent As generators are the same for all scenarios. This means that, although the problem size increases with the number of scenarios, the number of binary variables in the BE expansion is the same as in the deterministic case.

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which can be handled by discretizing and applying the BE scheme, as described previously. 2) Call/Put Options: Suppose now that agent A has sold a is the option premium (in dollars), is call option, where is the the strike price (in dollars per Megawatthour), and contracted amount. Problem (6) and (7) then becomes (82) subject to (83) (84) (85) where is the cost (in dollars) to agent A when the buyer is equal to the exercises the call option. As seen in (84), (positive) difference between spot and strike prices, multiplied by the contracted amount. (assume the The joint optimization of contract amount strike price is known) and of price/quantity bids in the shortterm market introduces a new product of variables. As in the can be discretized, and previous case, the contracted amount the BE scheme can be applied to the product . The same approach applies if put options are considered. 3) Capacity Expansion Decisions: In this case, let us assume that agent A may decide on the construction of new generation capacity , with unit investment cost (in dollars per installed Megawatts): (86) subject to (87) (88) where t denotes the time period. Because the BE strategic bidding (35)(49) is already an MILP problem, the incorporation of the integer capacity investment model (86)(88) is straightforward. In this case, the additional set of binary decision variables is , which is the investment decision on project . D. Unit Commitment In all previous discussions, it was assumed that the operating cost was a linear function of energy production. Similarly to the MILP approach proposed in [21], the BE scheme allows the representation of nonconvex cost functions and, in particular, the modeling of unit commitment. Suppose that each generator has a start-up cost of (in dollars). The operating costs are modeled as the following mixed integer linear relation: (89) subject to (90) (91)

where represents the (binary) decision to start up generator j. As in the capacity investment case, the unit commitment constraints (87)(89) can be incorporated directly to the BE formulation. E. Pure Price Bid and Pure Quantity Bid Models Pure price bid and quantity bid models are represented as special cases of the joint price/quantity optimization framework presented previously: The quantity bid model predenes price (usually at zero) and optimizes quantity bids bids . Conversely, the price bid model predenes quan(usually at the maximum capacity and tity bids . This approach forms the basic optimizes price bids framework for the well-known Bertrand and Cournot models [7], widely used in game-theoretical equilibrium models (see [10], [11], and [19]). V. CASE STUDY The BE solution approach will be illustrated with a case study derived from the Brazilian system. A. Brazilian System Overview 1) Generation System: Brazils surface area is equivalent to the continental USA plus half of Alaska. The generation system had a total installed capacity in 2003 of 83 GW. Hydro generation accounts for 85% of the installed capacity, with 110 hydro plants arranged in complex topologies over 12 main river basins. Thermal generation (28 plants) includes nuclear, natural gas, coal, and diesel plants. Generation plant sizes include a few very large plants, such as Itaipu (12.6 GW) and Tucurui (8 GW), several mid-sized plants (12 GW range), and the remainder between 100 and 500 MW. The whole country is interconnected by 70 000 km of high-voltage transmission lines. 2) Sector Reform: The power sector reform started in the mid-1990s, with the privatization of most distribution companies and the creation of the regulatory agency of the National System Operator and of the Wholesale Energy Market. As part of the second phase of the reform process in 2002, the Ministry of Mines and Energy and the regulator investigated the possibility of implementing a price bidding system in Brazil. In order to address the concerns about the effects on the operation of hydro plants in cascade and market power, several analytical tools were developed, including a market simulator, a stochastic dynamic programming Nash equilibrium model [13] for hydro bidding, a model to simulate the competitive operation of hydro plants in cascade [15], and the binary expansion model presented in this work. B. Bidding Model 1) Strategic Bidder: The Brazilian generation system is composed of 11 companies, located in four zones. The bidding agent Companhia Energtica de So Paulo (CESP) controls ve hydro plants, with a total capacity of 6900 MW (about 8% of the systems installed capacity). Table I shows the plant names, capacities, and variable operating costs. The optimization is carried out for a single hour. The variable operating costs for the hydro plants correspond to their

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TABLE I CESP GENERATION SYSTEM

TABLE II OPTIMAL BID PRICES

water values, which are the opportunity costs of storing the energy and selling it in the future. The water values were taken from a stochastic hydrothermal scheduling model [8], [18] that is similar to the one used by the Brazilian National System Operator. In order to obtain the hourly water values, a traditional integrated long-mid-short-term study was carried out with this model: In the long term, the time stage is a month; the mid-term contemplates a weekly step; and the short-term can consider a daily or hourly time step, where all studies are chained by the well-known future cost function, which provides the opportunity costs of storing the energy and selling it in the future (see [8], [17], and [18]). 2) Strategic Bidder Model: A pure price bid model was used, that is, only prices are decision variables for CESP; the bid quantities are the generator capacities. The pricing decisions of each plant were divided into 128 segments in the range [100%; 300%] of the respective water value. 3) Bidding Scenarios: As seen in the previous sections, the bidding scenarios include total load and price/quantity bid for the remaining 133 generators of the system. Ten bidding scenarios were created by randomly sampling the following parameters: load level: sampled from a normal distribution with coefcient of distribution 10% around the predicted peak load; quantity bid: the capacity of each generator was sampled from a binomial distribution for the forced outage rate; CESPs plants were assumed to be available; price bid: were kept constant and equal to the water value, in the case of hydro plants, or variable operation cost in the case of thermal plants. The water values were calculated following the same approach used for CESP generators. Although, in this case study, the uncertainty relies on the availability of the other agents plants, uncertainty can also be modeled by different methods, such as using historic information.1 In this context, one possible approach is to forecast the demand behavior of the day under study and use a clustering method to select past days sufciently similar to this one, such as presented in [1]. Then, each of these selected days would form a scenario for price and quantity.
1In some electricity markets, such as in Spain, the former electricity market of California, the PJM electricity market, the Australian and New Zealand power pool, and the electricity market of El Salvador, the information on the pricequantity bid of each agent is available once the market has been cleared. It is true, however, that this information is sometimes available only to the market agents and that some markets only make it available some months after the market clearing.

TABLE III RESULT: ENERGY PRODUCTION (IN MEGAWATTS) AND SPOT PRICE BRAZILIAN REAL PER MEGAWATTHOUR)

(IN

Note that the use of different sampling methods may produce different scenario outcomes. Thus, since the optimal bidding strategy obtained by the model is compatible with the set of scenarios considered, considering a different set of scenarios will lead to a new optimal bidding strategy. 4) BE Model: The stochastic BE model (56)(70) has binary variables for each of the ve plants. The total number of integer variables is, thus, equal to 40. There are 2694 continuous variables (spot price and generation of each plant in each scenario, other dual variables, etc.) and 2545 constraints. An Xpress MILP solver [24] was used to nd the optimal solution. The elapsed time was 120 s on a PC with a Pentium IV 2.4 GHz processor and 512 Mbytes RAM. C. Results The expected net revenue with the BE bids was R$ 545 000, against R$ 477 000 with a cost-based bid, which is a gain of R$ 68 000 (14%). Table II compares the BE price bids with the operating costs of Table I. These price bids form the bidding curve that CESP supplies to the market. Note that only two generatorsJaguari and I. Solteirahad bid prices that were different from their respective costs. Table III shows the production of each plant and the spot price in each of the ten scenarios used in the optimization. Fig. 1 compares those spot prices with the ones that would result from cost-based bids.

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Fig. 1.

Spot prices (optimal bidding and cost-based bid) in each scenario.

Fig. 3. Difference between the net revenue obtained with the BE model price bids and cost-based bids in each scenario.

VI. CONCLUSIONS This paper presented a BE solution approach to the problem of strategic bidding under uncertainty in short-term electricity markets. The BE scheme is used to transform the products of variables in the nonlinear bidding problem into a MILP, which can be solved by commercially available computational systems. The BE scheme is applicable to pure price, quantity, or joint price/quantity bidding models. It is also possible to represent transmission networks (zonal and DC power ow), uncertainties (scenarios for price, quantity, plant availability, and load), nancial instruments, capacity reinforcement decisions, and unit commitment. The application of the methodology is illustrated in case studies with congurations derived from the 80-GW Brazilian system. REFERENCES Note that spot prices from the BE bidding strategy were higher than the cost-based ones in six of the ten scenarios. Fig. 2 compares CESP total generation in each scenario for both bidding strategies. One can see in Table III that CESP had the marginal generator (I. Solteira) in scenarios 3, 4, 8, and 9, which naturally led to smaller generation levels than those observed with cost-based bids. In scenarios 1 and 10, CESP did not have the marginal generator; instead, Jaguari was displaced in the merit order but increasing the companys net revenue in these scenarios, as one can see in Fig. 2. Fig. 3 shows the difference between BE-based and cost-based net revenues for each scenario. One can see that in scenarios 6 and 7, the difference is zero. The reason is that the spot prices for those scenarios exceeded the price bid of I. Solteira. As a consequence, the bidding strategy had no effect on the net revenue. Furthermore, the net revenue difference in scenarios 2 and 5 is negative, indicating that the cost-based bid was superior to the BE bidding strategy for those scenarios. The reason is that the spot price is in between the variable operating cost of Jaguari and its bid price (see Tables II and III). As a consequence, the plant did not dispatch and missed the opportunity to generate a prot. However, as seen in Fig. 2, this loss was more than offset by higher gains in other scenarios, leading to the already mentioned average gain of R$ 68 000.
[1] A. Baillo, M. Ventosa, M. Rivier, and A. Ramos, Optimal offering strategies for generation companies operating in electricity spot markets, IEEE Trans. Power Syst., vol. 19, no. 2, pp. 745753, May 2004. [2] H. Y. Benson, A. Sen, D. F. Shanno, and R. Vanderbei, Interior-Point Algorithms, Penalty Methods and Equilibrium Problems, Dept. Oper. Res. Financial Eng., Princeton Univ., Princeton, NJ, Tech. Rep. ORFE-03-02, 2003. [3] J. Bushnell, A mixed complementarity model of hydrothermal electricity competition in the western United States, Oper. Res., vol. 51, no. 1, pp. 8093, 2003. [4] A. J. Conejo and F. J. Prieto, Mathematical programming and electricity markets, Sociedad de Estadstica e Investigacin Operativa TOP, vol. 9, no. 1, pp. 153, 2001. [5] A. J. Conejo, J. Contreras, J. M. Arroyo, and S. de la Torre, Optimal response of an oligopolistic generating company to a competitive poolbased electric power market, IEEE Trans. Power Syst., vol. 17, no. 2, pp. 424430, May 2002. [6] R. Fletcher and S. Leyffer, Numerical Experience With Solving MPEC and NLPs. Dundee, UK: Univ. Dundee Press, 2002. [7] D. Fudenberg and J. Tirole, Game Theory, Fifth ed. Cambridge, MA: MIT Press, 1996. [8] S. Granville, G. C. Oliveira, L. M. Thom, N. Campodnico, M. Latorre, M. V. Pereira, and L. A. Barroso, Stochastic optimization of transmission constrained and large scale hydrothermal systems in a competitive framework, in Proc. IEEE General Meeting, Toronto, ON, Canada, 2003. [9] G. Gross and D. Finlay, Generation supply bidding in perfectly competitive electricity markets, Comput. Math. Org. Theory, vol. 6, pp. 8398, 2000. [10] B. F. Hobbs, C. B. Metzler, and J.S. Pang, Strategy gaming analysis for electric power systems: an MPEC approach, IEEE Trans. Power Syst., vol. 15, no. 2, pp. 638645, May 2000. [11] B. F. Hobbs and U. Helman, Complementarity-based equilibrium modeling for electric power markets, in Modeling Prices in Competitive Electricity Markets, D. Bunn, Ed. New York: Wiley, 2004.

Fig. 2. CESP total generation (optimal bidding and cost-based bid) in each scenario.

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Srgio Granville (M94) received the Ph.D. degree in operations research from Stanford University, Stanford, CA, in 1978. He joined Power Systems Research, Rio de Janeiro, Brazil, in 2000 and is currently engaged in risk management for energy markets and software development for power systems. Previously, he was a Visiting Scholar at Stanford University and researcher coordinator at Cepel, Rio de Janeiro, developing methodologies and software for system operation optimization and expansion planning.

Marcia H. C. Fampa received the Ph.D. degree in optimization from COPPE/Universidade de Federal do Rio de Janeiro, Rio de Janeiro, Brazil, in 1996. She is a professor with the Department of Computer Science of the Institute of Mathematics and at COPPE/UFRJ.

Rafael Dix received the B.Sc. degree in electrical engineering from Pontical Catholic University of Rio de Janeiro (PUC/Rio), Rio de Janeiro, Brazil, in 2002, and is working toward the M.Sc. degree in mathematical economics at the Instituto de Matemtica Pura e Aplicada, Rio de Janeiro. He has been working in strategic bidding and market power in energy markets.

Mario Veiga Pereira (M01) received the Ph.D. degree in optimization from COPPE/Universidade de Federal do Rio de Janeiro, Rio de Janeiro, Brazil, in 1985. He is the president of Power Systems Research (PSR), Rio de Janeiro, and he is currently engaged in regulatory studies and the development of new methodologies and tools for risk management in competitive markets. Previously, he was a project manager at the Energy Power Research Institutes (EPRI) Power Systems Planning and Operation (PSPO) program, Palo Alto, CA, and research coordinator at Cepel, Rio de Janeiro, where he developed methodologies and software for expansion planning, reliability evaluation, and hydrothermal scheduling tools. Dr. Pereira was a coreceiver of the Franz Edelman Award for Management Science Achievement, granted by ORSA/TIMS for his work on stochastic optimization applied to hydro scheduling.

Luiz Augusto Barroso (S00) received the M.Sc. degree in optimization from the Universidade de Federal do Rio de Janeiro (UFRJ), Rio de Janeiro, Brazil, in 2000. He is now working toward the Ph.D. degree in optimization at COPPE/UFRJ. He joined Power Systems Research, Rio de Janeiro, in 1999, where he has been working in project economics evaluation, system planning studies, strategic bidding, and market power in energy markets. He has been a speaker on deregulated energy markets issues in the USA, Canada, Latin America, and Europe.