Energy Auction Alternatives
Auction Services
Sam Dinkin
Chief Economist
June 25, 2003
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The kinds problem we are solving
• Offshore leases, government sales and
foreign concessions
• Property acquisition and disposition
 Power plant sales
• Power purchasing and sale
 NJ BGS auction
 Texas Capacity Auction
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 The National Petroleum Reserve has a
collection of similar oil leases
• Simultaneous Ascending Clock Auctions
(SACA) auctions improve results by
allowing “switching”
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Page 2
“Switching” Illustration
 Widget X and Widget Y
• There is one “strong”
bidder, “A”
X
Value
Table
 Willing to buy either item
for up to $1000
 Isn’t interested in both –
who needs two widgets?
• Values can be shown in
a table
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X
Y
$1000 $1000
• 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
Y
Widget
Bidder
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• There are two items
being auctioned
$500 $200
$200 $500
Page 3
Value
Table
Widget
X
Y
No
Bought
longer
for
$1000
$1000
$500 valued
Bidder
$500 $200
$200
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Bought
for
$500
$200
• 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:
$300
$500
• The total revenue
from this auctionSold
is
Sold
to
$700
to
$100
Bidde
$400
• The “afternoonrBidde
effect”
A for
r$500!
C for
is clear: the price
$200!
dropped dramatically
in the $200
later auction
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Sequential Auctions
Page 4
Simultaneous Auction
 The end$300
prices on
were
X the
$100
$500
same
 The final revenue was
X is
Soldofto
B
$1000,
instead
$700
for $500!
$400
$200
on Y
• Simultaneous
bidding
Y is Sold to A
avoids thefor
price
drop!
$500!
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Value
Table
Bidder
Widget
X
Y
$1000
Bought
for
$1000
$500
Bought
for
$500
$500
$200
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• A simultaneous auction
is superior
• Bidders, in particular
the “strong” bidders,
can switch between the
two widgets:
• Because the strong
$300
Y
$200
X to
$400
$100
$500
bidder, “A”
was on
able
switch back and forth
between the two items
$200 $500
Page 5
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
 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
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• “Strong” bidders win earlier auctions (certainty) and then
go home
• Simultaneous auctions have similar prices for similar lots
and have higher revenues than sequential auctions
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Page 6
• 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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Emerging Answer: Simultaneous Auction
Page 7
Simultaneous Auctions Are Superior
 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
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• Iterative nature of multiple rounds means;
 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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Page 8
Sealed Bid vs. SACA: Bidder Values
 Bidder A values:
• X for $1700
• Y for $1700
• X & Y for $2800
Value
Value Value
Y
Bidder
for
Y
X
X
for X for Y
X&Y
X
Y
$1700 $1700 $2800
 Bidder B values:
• X for $1500
• Y for $1000
• X & Y for $2600
$1500 $1000 $2600
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• A typical situation in
which a SACA generates
higher revenues
• Two leases: X and Y
• Three bidders:
 Bidder C values:
• X for $1000
• Y for $1500
• X & Y for $2400
• These values are shown
in the table to the left:
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$1000 $1500 $2400
Page 9
Sealed Bid vs. SACA: Sealed Bid Outcome
X&Y
For
Y
$1400 $1700
$1300 $2800
$1700
X
$2700
• $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:
None
$1300 $1000
$900 $2600
$1500
• $1300 on X
• $900 on Y
 Bidder C’s strategy is
to bid:
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Value • In a sealed bid
Bid
Bid Leases
Value
Value
auction:
Bidder
for
Y
Y Y Won
X X for
X
for
 Bidder A’s strategy is
X&Y
to bid:
• $800 on X
• $1200 on Y
None • The result:
$800 $1500
$1200 $2400
$1000
 Total profit: $100
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Page 10
Sealed Bid vs. SACA: SACA Outcome
 Bidding starts at $800
 Ties are broken at random
• No further bids above $1500
• BiddersRound
A and C could
Round
11
1
3
8
4
6
10
12
13
2
5
7
9
observe the auction as it
progressed
Bid Because
$1400
$1200
$1500
$1000
A could
$900
$1300
$800
$800 Bidder
$900
$1100
$800
avoid the undesirable
outcome of winning both
leases, higher bids became
Bid safe
$900
$1300
$900
$800
$1100
$1000
$800 $1500
$1400
$800 $1000
$1200
 Because Bidder C could see
on Y that a $1200 bid could not
win, a higher bid became
strategically necessary
Value
Value Value
Bidder Outcome
for
Y
Y
X
X
for X for Y
X&Y
Bought
$1700 $1700
$2800
for $1500
on X
• Higher efficiency means
higher bidder profit
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$1500 $1000 $2600
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• In an SACA auction, bidders
can safely be more
aggressive:
Bought
$1000 $1500 $2400
for $1500
Page 11
Alkera’s Auction Experience
Experience in complex, multi-billion auctions with impressive results:
New Jersey: Market design and software development for the simultaneous
descending clock auction run by electricity distributors
Italy: Market design and auction software developed for the 3G mobile
wireless and Broadband spectrum auctions run by the Ministry of
Communications.
Guatemala: Market design and auction software developed for the
Secretary of International Communications
Canada: Auction software developed for Industry Spectrum Management
Agency
Mexico: Market design and auction software developed for Commicion
Federale de Telecommunicaciones
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Singapore: Market design and auction software developed for the 3G
auction organised by the Infocomm Development Agency
U.S.: Software and hosting for a US water auction in one of the largest
metropolitan markets of the United Sates
Texas: Market design and software for a simultaneous ascending clock
auction run by power generating companies
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