Energy Auction Alternatives

1
Energy Auction Alternatives

• Sam Dinkin
• Chief Economist

2
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

3
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
• Isnt 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

Y
X
X
Y
A
C
B
4
Sequential Auctions

• Suppose Widget X is auctioned first
• A typical auction might proceed as follows
• Having won Widget X, Bidder A doesnt 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

X
Y
Bought for 500
No longer valued
300
500
Sold to Bidder A for 500!
Sold to Bidder C for 200!
100
400
Bought for 200
200
5
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!

X
Y
Bought for 500
300 on Y
100 on Y
200 on X
400 on X
500 on Y
Bought for 500
100 on X
300 on X
500 on X
X is Sold to B for 500! Y is Sold to A for 500!
200 on Y
400 on Y
6
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

7
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

8
Simultaneous Auctions Are Superior

• Iterative nature of multiple rounds means
• Bidders dont 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

9
Sealed Bid vs. SACA Bidder Values
X
Y

• 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

Y
Y
X
X
10
Sealed Bid vs. SACA Sealed Bid Outcome

• In a sealed bid auction
• Bidder As strategy is to bid
• 1400 on X
• 1300 on Y
• This allows a profit even in the case where both
  leases are won
• Bidder Bs strategy is to bid
• 1300 on X
• 900 on Y
• Bidder Cs strategy is to bid
• 800 on X
• 1200 on Y
• The result
• Total profit 100

Y
Y
X
X
X Y For 2700
Y
X
None
None
11
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

Y
Outcome
Y
X
X
Bought for 1500
Round 1
Round 2
Round 3
Round 4
Round 5
Round 6
Round 7
Round 8
Round 9
Round 10
Round 11
Round 12
Round 13
1200
1400
800
900
1000
1300
1500
800
800
900
1100
1500
800
900
900
1000
1100
1300
800
800
1000
1200
1400
Bought for 1500
12
Alkeras 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
Singapore Market design and auction software
developed for the 3G auction organised by the
Infocomm Development Agency
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
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