1. Auction Services Alkera, Inc. Proprietary & Confidential June 25, 2003 Energy Auction Alternatives Sam Dinkin Chief Economist

2. Auction Services Page 2 Alkera, Inc. Proprietary & Confidential 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. Auction Services Page 3 Alkera, Inc. Proprietary & Confidential Value Table Widget Bidder $1000 $500$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

4. Auction Services Page 4 Alkera, Inc. Proprietary & Confidential 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 Value Table Widget Bidder $1000 $500$200 $500 X Y $100 $200 $300 $400 $500 Sold to Bidde r A for $500! Bought for $500 No longer valued Sold to Bidde r C for $200! Bought for $200

5. Auction Services Page 5 Alkera, Inc. Proprietary & Confidential 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! Value Table Widget Bidder $1000 $500$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 Y Bought for $500 X is Sold to B for $500! Y is Sold to A for $500!

6. Auction Services Page 6 Alkera, Inc. Proprietary & Confidential 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. Auction Services Page 7 Alkera, Inc. Proprietary & Confidential 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. Auction Services Page 8 Alkera, Inc. Proprietary & Confidential 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

9. Auction Services Page 9 Alkera, Inc. Proprietary & Confidential 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 Y X Y Y X Bidder Value for X Value for Y Value for X & Y $1700 $2800 $1500$1000$2600 $1000$1500$2400

10. Auction Services Page 10 Alkera, Inc. Proprietary & Confidential Y X 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 Y X Bidder Value for X Value for Y Value for X & Y $1700 $2800 $1500$1000$2600 $1000$1500$2400 Bidder Bid for X Bid for Y Leases Won $1400$1300 $900 $800$1200 X & Y For $2700 None

11. Auction Services Page 11 Alkera, Inc. Proprietary & Confidential 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 Y X Bidder Value for X Value for Y Value for X & Y $1700 $2800 $1500$1000$2600 $1000$1500$2400 Bid on X Bid on Y $800 $900 $1000 $1100 $1200 $1300 $1400 $1500 Bought for $1500 Bought for $1500 Bought for $1500 Bought for $1500 Outcome Round 1 Round 2 Round 3Round 4 Round 5 Round 6 Round 7 Round 8 Round 9Round 10 Round 11 Round 12Round 13

12. Auction Services Page 12 Alkera, Inc. Proprietary & Confidential 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