Insights from Experimental Economics for the design of
Australian electricity, gas and environmental markets

A workshop for Australian stationary energy sector stakeholders with

Professors Vernon Smith and Stephen Rassenti

George Mason University, USA

Presentations

8:30 am – 10:30 am Session 1:

Markets for Gas and Electricity: Using the Laboratory

Professors Smith and Rassenti will give an overview of field of experimental economics

and use examples to illustrate its application to the design of electricity and gas markets. They

will discuss how simplified experimental market designs can be used to explore important

issues of practical market design.

Australian perspectives: (10 mins each)

David Swift, NECA [paper]

Murray Chapman, NEMMCO [presentation]

Relevant papers from GMU:

S. Rassenti, V. Smith, B. Wilson, Using Experiments to Inform the Privatization/Deregulation

Movement in Electricity, The Cato Journal, Volume 22, Issue 3, Winter 2002. [pdf].

K McCabe, S. Rassenti, V. Smith, Auction Design for Composite Goods: The Natural Gas

Industry, Journal of Economic Behavior and Organization, vol. 14, no. 1, September 1990, pp.

127-49 [hard copy on request]

M.A. Olsen, S.J. Rassenti, V.L. Smith, and M. Rigdon, Market Design and Motivated Human Trading

Behavior in Electricity Markets, IIE Trans. 2002 [pdf]

10:45 AM – 12:45 PM Session 2:

Getting the incentives right for investment in electricity and gas networks

Professors Smith and Rassenti will outline their work regarding gas & electricity

transmission networks –. They will illustrate how active market participants (sellers or buyers)

may capture the rents that would have been expected to flow to passive network service

providers as typically found in the electricity industry (but not the gas industry).

Australian perspectives: (10 mins each)

Darryl Biggar, ACCC [paper] [presentation]

Brian Spalding, NEMMCO [presentation]

General discussion session & recommendations

Relevant papers from GMU:

Backerman, Steven R; Rassenti, Stephen J; Smith, Vernon L, Efficiency and Income Shares in

High-Demand Energy Networks: Who Receives the Congestion Rents When a Line Is

Constrained?, Pacific Economic Review, vol. 5, no. 3, October 2000, pp. 331-47 [pdf].

Rassenti, Stephen J; Reynolds, Stanley S; Smith, Vernon L, Cotenancy and Competition in an

Experimental Auction Market for Natural Gas Pipeline Networks, Economic Theory, vol. 4, no.

1, January 1994, pp. 41-65 [hard copy on request]

McCabe, Kevin A; Rassenti, Stephen J; Smith, Vernon L, Experimental Research on Deregulated

Markets for Natural Gas Pipeline and Electric Power Transmission Networks, Research in Law

and Economics, vol. 13, no. 0, 1991, pp. 161-89 [hard copy on request]

1:45 pm – 3:45 pm Session 3:

Achieving effective competition on both the supply and demand side.

Professors Smith and Rassenti will outline their work on electricity market design and

competition:

In particular:

- The role of Demand Side participants in managing price volatility and controlling

market power and, if time permits, results from an experiment on an asymmetric

market design in which successful demand side participants are paid ‘as bid’ (as

suggested in the COAG Energy Market Review Final Report, p 178).

- The role of financial instrument markets for electricity

- Joint solution of energy and reserves markets

Australian perspectives: (10 mins each) (to be confirmed)

Eric Groom, IPART

Les Hosking, AXISS [presentation]

Relevant papers from GMU:

S. J. Rassenti, V.L. Smith, and B. Wilson, Turning Off the Lights, Regulation 24(3), Fall 2001. [pdf].

(also available at: http://www.cato.org/pubs/regulation/regv24n3/specialreport2.pdf)

S. J. Rassenti, V.L. Smith, and B. Wilson, California: Energy Crisis or Market Design Crisis [pdf].
(also available at: http://www.ices-gmu.org/pdf/materials/373.pdf)

S. J. Rassenti, V.L. Smith, and B. Wilson, Controlling Market Power and Price Spikes in

Electricity Networks: Demand-Side Bidding [pdf].

(also available at: www.pnas.org)

S. J. Rassenti, V.L. Smith, & B. Wilson, Discriminatory Price Auctions in Electricity Markets:

Low Volatility at Expense of High Price Levels. [pdf].

(also available at: http://www.ices-gmu.org/pdf/materials/375.pdf)

V L Smith, Regulatory Reform in the Electric Power Industry, Regulation, vol. 19, no. 1, 1996,

pp. 33-46

(available at: http://www.cato.org/pubs/regulation/reg19n1a.html)

M.A. Olsen, S.J. Rassenti, V.L. Smith, and M. Rigdon, Market Design and Human Trading

Behavior in Electricity Markets, IIE Trans. 2002 [pdf]

4:00 pm – 5:30 pm Session 4:

Incorporating the environment –Design of Greenhouse emission trading and related markets.

Professors Smith and Rassenti will outline their research in the design and performance

of markets in environmental instruments

Australian perspectives: (10 mins each) (to be confirmed)

Mark Bonner, AGO

Simon Smith, NSW EPA [presentation]

Relevant papers from GMU:

T. Ishikida, J. Ledyard, M. Olson, Experimental Testbedding of a Pollution Trading System:

Southern California’s RECLAIM Emissions Market , Research in Experimental Economics, Vol.

8; Mark Isaac, Editor; pgs. 185-220. [pdf]

Please contact Hugh Outhred for further information. Tel: 02 9385 4035; email: h.outhred@unsw.edu.au.