Timothy Cason, Purdue University Charles Plott, Caltech

1. The Impact of Buyer Information Disclosure on Electricity Procurement: A Cautionary Tale about Transparency in Markets Timothy Cason, Purdue University Charles Plott, Caltech

2. Is more information always better? • Price discovery in markets leads to aggregation of diverse, private information • Mandating private information disclosure, for transparency, can affect exchange surplus distribution • These experiments demonstrate that the disclosing side is disadvantaged • particularly in environments with a wide range of competitive prices, and in periods when supplies are “tight”

3. Policy Application: California Electricity Procurement • California Investor-Owned Utilities (IOUs) procure about two-thirds of their energy requirements • Spot markets, short- and medium-term contracts • Their suppliers, third-party intervenors (including ratepayer advocates) and the California Energy Commission (CEC) have demanded more info disclosure from IOUs • E.g., short- and long-term planning data, price, forecast and availability data (including their “residual net short” position)

4. Whose interests are being served? • The CEC and ratepayer advocates should be interested in the IOUs’ procurement costs, if their goal is to reduce prices paid for electricity by consumers in the state • The suppliers can look out for themselves, and they clearly have a vested interest in obtaining information from their bargaining opponent • IOUs also care about providing (long-term) incentives for suppliers to build more capacity and in attracting entry into electricity supply

5. The Role of Experimental Markets • These are proposed new regulations, so without experimental tests the debate would be limited to the theoretical domain • Empirical evidence has an important role to play in this type of policy decision • Experiments have their limitations, but in applications like this they provide one of the only sources of empirical insight • It is difficult to identify comparable non-California environments, with and without similar info disclosure regulations

6. Experiment #1 – Negotiated Price Markets (Economic Inquiry, Oct. ’05) • Representing short-term and medium-term contracts • Decentralized negotiation between buyers and sellers • Private, computerized negotiations, without even public price information • Does equilibrium emerge? (Yes) • What are the implications of revealing bounds on underlying (induced) demand values or supply costs?

7. Orders from experimenter similar to redemption values or private costs appear here. Own outstanding orders sent to other agents shown here Orders are placed here. Choice of Market allows order to go to specific agent. history and information at this link. Orders from other agents appear here.

8. Results Summary • When one side of the market (e.g., buyers) must reveal information about their trading interests, the other side (e.g., sellers) obtain a pricing advantage • Particularly during the equilibration phase • Prices do not adjust to reflect cost reductions when only sellers are aware of the underlying change in market conditions

12. Experiment #2 – Auctions with Quantity Information Disclosed • Our critics suggested that electricity procurement is more “akin to an auction process” with discriminative pricing rules • IOUs viewed the info they were being asked to disclose as their residual net short (RNS) position: i.e., their quantity demanded in such an auction representation • The implications for transaction prices can also be assessed in this very different, centralized auction trading institution

13. Important Features of IOUs’ Demand for Capacity The key factor is the net short demand. That is the quantity beyond which demand for capacity drops off. The company will pay a premium to acquire power capacity to cover its net short demand. After that level additional capacity has much less value. The Residual Net Short Supply Level 1 Supply Level 2 Supply Level 3 Price of Capacity $/kWh The concept of a competitive equilibrium price illustrates the information contained in the net short concept. Value of Capacity KWh Capacity Demand Slight decreases in supply that cause a shortfall in meeting the renewable net short demand can cause sharp and dramatic increases in the competitive equilibrium price. Such spikes have been experienced before in the California markets. Supply beyond net short has very little influence on the competitive equilibrium price.

14. Note: Unlike previous experiment, demand values are unknown to sellers. Instead, we examine the impact of revealing quantity demanded (RNS).

15. Offer “markups” over cost cannot be sensitive to undisclosed RNS

16. Announcement of Net Short Position and Supplier’s Understanding of the General Properties of Market Demand and Supply Coordinates Strategies Among Suppliers to Create Upward Pressures on Prices in the Marketplace Announced Net Sort Procurement small Announced Net Short Procurement large Price of Capacity $/kWh Competitive Supply function. Net Short Demand for Capacity KWh Capacity Power Large net short means tight supply relative to planned procurement (demand) and thus less aggressive competition by all suppliers. Offers are high. Small net short signals abundant supply relative to planned procurement (demand) and thus aggressive selling behavior by all suppliers. Offers are low.

17. Offer markups over cost rise as announced RNS signals market tightness

18. Comparison of aggregate offer schedules with and without disclosure

19. Similar effects observed for individual offer functions Offers are the same regardless of net short if net short is not disclosed. cost

20. As disclosed net short goes up the asking prices go up. This occurs even though costs are constant throughout. cost

21. Supplies are tight. Auctions in which Residual Net Short is small: supplies abundant. RNS revelation raises transaction prices except when supplies are abundant

22. The percentage increase of excess cost is constant. This means that the excess cost increases was exponential with the growth of the disclosed Net Short. The gap of excess procurement cost grew exponentially. RNS disclosure raises procurement costs

23. Conclusion • These experiments span a range of plausible representations of this market • Decentralized private negotiations with value or cost disclosure • Centralized auctions with quantity disclosure • As long as the principles of supply and demand operate both in the laboratory and in the field, this empirical evidence shifts the burden of proof onto suppliers who claim disclosure benefits Cal. consumers

24. Extensions • We believe the disclosure impacts in the auction arise from coordination among sellers, not market power or tacit collusion • This can be verified with auctions with a larger number of sellers • Disclosure proponents have claimed that this info is useful for attracting entry • But do the harmful cost impacts of disclosure overwhelm the possible good of additional entry? • If disclosure is so beneficial, why must IOUs be forced to adopt it?