Auction Services

Alkera, Inc. Proprietary & Confidential

June 25, 2003

Energy Auction Alternatives

Sam DinkinChief Economist

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The kinds problem we are solving• Offshore leases, government sales and

foreign concessions The National Petroleum Reserve has a

collection of similar oil leases• Property acquisition and disposition

Power plant sales• Power purchasing and sale

NJ BGS auction Texas Capacity Auction

• Simultaneous Ascending Clock Auctions (SACA) auctions improve results by allowing “switching”

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ValueTable

Widget

Bidder

$1000 $1000

$500 $200

$200 $500

“Switching” Illustration• There are two items

being auctioned Widget X and Widget Y

• There is one “strong” bidder, “A” Willing to buy either item

for up to $1000 Isn’t interested in both –

who needs two widgets?

• There are two “weak” bidders Bidder “B” will pay up to

$500 for Widget X or up to $200 for Widget Y

Bidder “C” will pay up to $200 for Widget X or up to $500 for Widget Y

• Values can be shown in a table

X Y

X Y

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Sequential Auctions• Suppose Widget X is

auctioned first• A typical auction

might proceed as follows:

• Having won Widget X, Bidder A doesn’t bid in the auction for Widget Y:

• The total revenue from this auction is $700

• The “afternoon effect” is clear: the price dropped dramatically in the later auction

ValueTable

Widget

Bidder

$1000 $1000

$500 $200

$200 $500

X Y

$100

$200

$300

$400

$500Sold to

Bidder A for $500!

Bought for

$500

No longer valued

Sold to

Bidder C for $200!

Bought for

$200

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Simultaneous Auction• A simultaneous auction

is superior• Bidders, in particular

the “strong” bidders, can switch between the two widgets:

• Because the strong bidder, “A” was able to switch back and forth between the two items The end prices were the

same The final revenue was

$1000, instead of $700

• Simultaneous bidding avoids the price drop!

ValueTable

Widget

Bidder

$1000 $1000

$500 $200

$200 $500

X Y

$100 on Y

$100 on X

$200 on Y

$200 on X

$300 on X

$300 on Y

$400 on Y

$400 on X

$500 on X

$500 on YBought

for $500

Bought for

$500

X is Sold to B for $500!

Y is Sold to A for $500!

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The “Afternoon Effect”• When items are auctioned in sequence, prices tend to

drop off in later auctions Known as the “afternoon effect” – as the sun begins to fall,

so do prices• “Strong” bidders win earlier auctions (certainty) and then

go home I.e. those willing to pay the most

• In the later auctions, only the “weak” bidders are left I.e. those willing to pay the least

• With weaker bidders, prices are lower• Actually happened in US Broadcast Satellite auction• It pays for the strong bidder to sometimes bide his time

Even when prices are higher in the second auction, the different prices are unfair and lower revenue overall

• Simultaneous auctions have similar prices for similar lots and have higher revenues than sequential auctions

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Emerging Answer: Simultaneous Auction

• ERCOT and PJM, the two most progressive electric grids, have used simultaneous auction for over $10B in electricity sales Sources at New Jersey Board of Public Utilities and electricity

distribution companies estimate they would have been $1.3B worse off had they used sealed bids

• Alberta power generation sales• EDF auction• Upcoming Northeast Regional Capacity Market• FCC used to sell $30B of telecom spectrum in dozens

of auctions with geographical synergies

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Simultaneous Auctions Are Superior

• Iterative nature of multiple rounds means; Bidders don’t have to guess what it takes to win Bidders can improve bids each round Bidder gain valuable information about valuations in the market

that reinforce their own valuations Bidders can be assured of not winning more than they want

• Rules are designed to be efficient The auction is fast: the bid increment is large when there is a lot

of competition and small when there is a little competition. Tie-break rules select the most interested bidder at each step in

the bidding process The high value bidder always wins paying a lower % of their

maximum value increasing auction revenue and bidder profit• Fair to all participants

Substitution between similar lots provides additional competition from low-quantity bidders

• Expert auction design provides strong weight in Board Room decisions

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Sealed Bid vs. SACA: Bidder Values• A typical situation in

which a SACA generates higher revenues

• Two leases: X and Y• Three bidders:

Bidder A values:• X for $1700• Y for $1700• X & Y for $2800

Bidder B values:• X for $1500• Y for $1000• X & Y for $2600

Bidder C values:• X for $1000• Y for $1500• X & Y for $2400

• These values are shown in the table to the left:

X YX Y YXBidderValuefor X

Valuefor Y

Valuefor

X & Y

$1700 $1700 $2800

$1500 $1000 $2600

$1000 $1500 $2400

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YX

Sealed Bid vs. SACA: Sealed Bid Outcome

• In a sealed bid auction: Bidder A’s strategy is

to bid:• $1400 on X• $1300 on Y• This allows a profit

even in the case where both leases are won

Bidder B’s strategy is to bid:

• $1300 on X• $900 on Y

Bidder C’s strategy is to bid:

• $800 on X• $1200 on Y

• The result: Total profit: $100

X Y YXBidderValuefor X

Valuefor Y

Valuefor

X & Y

$1700 $1700 $2800

$1500 $1000 $2600

$1000 $1500 $2400

BidderBid

for XBid

for YLeasesWon

$1400 $1300

$1300 $900

$800 $1200

X & YFor

$2700

None

None

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Sealed Bid vs. SACA: SACA Outcome• In an SACA auction, bidders

can safely be more aggressive: Bidding starts at $800 Ties are broken at random

• No further bids above $1500• Bidders A and C could

observe the auction as it progressed Because Bidder A could

avoid the undesirable outcome of winning both leases, higher bids became safe

Because Bidder C could see that a $1200 bid could not win, a higher bid became strategically necessary

• Higher efficiency means higher bidder profit

X Y YXBidderValuefor X

Valuefor Y

Valuefor

X & Y

$1700 $1700 $2800

$1500 $1000 $2600

$1000 $1500 $2400

Bidon X

Bidon Y

$800

$800 $800 $800

$800$800$900

$900 $900

$900

$1000

$1000

$1000

$1100

$1100

$1200

$1200 $1300

$1300 $1400

$1400 $1500

$1500

Bought for $1500Bought

for $1500

Bought for $1500Bought

for $1500

Outcome

Round 1Round 2Round 3Round 4Round 5Round 6Round 7Round 8Round 9Round 10Round 11Round 12Round 13

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Alkera’s Auction Experience

U.S.: Software and hosting for a US water auction in one of the largest metropolitan markets of the United Sates

Mexico: Market design and auction software developed for Commicion Federale de Telecommunicaciones

Canada: Auction software developed for Industry Spectrum Management Agency

Guatemala: Market design and auction software developed for the Secretary of International Communications

Italy: Market design and auction software developed for the 3G mobile wireless and Broadband spectrum auctions run by the Ministry of Communications.

Singapore: Market design and auction software developed for the 3G auction organised by the Infocomm Development Agency

New Jersey: Market design and software development for the simultaneous descending clock auction run by electricity distributors

Experience in complex, multi-billion auctions with impressive results:

Texas: Market design and software for a simultaneous ascending clock auction run by power generating companies