This dissertation consists of three empirical studies on nonlinear pricing in energy and environmental markets. The first investigates how consumers respond to multi-tier nonlinear price schedules for residential electricity. Chapter 2 asks a similar research question for residential water pricing. Finally, I examine the effect of nonlinear financial rewards for energy conservation by applying a regression discontinuity design to a large-scale electricity rebate program that was implemented in California. Economic theory generally assumes that consumers respond to marginal prices when making economic decisions, but this assumption may not hold for complex price schedules. The chapter "Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing" provides empirical evidence that consumers respond to average price rather than marginal price when faced with nonlinear electricity price schedules. Nonlinear price schedules, such as progressive income tax rates and multi-tier electricity prices, complicate economic decisions by creating multiple marginal prices for the same good. Evidence from laboratory experiments suggests that consumers facing such price schedules may respond to average price as a heuristic. I empirically test this prediction using field data by exploiting price variation across a spatial discontinuity in electric utility service areas. The territory border of two electric utilities lies within several city boundaries in southern California. As a result, nearly identical households experience substantially different nonlinear electricity price schedules. Using monthly household-level panel data from 1999 to 2008, I find strong evidence that consumers respond to average price rather than marginal or expected marginal price. I show that even though this sub-optimizing behavior has a minimal impact on individual welfare, it can critically alter the policy implications of nonlinear pricing. The second chapter " How Do Consumers Respond to Nonlinear Pricing? Evidence from Household Water Demand" provides similar empirical evidence in residential water markets. In this paper, I exploit variation in residential water pricing in Southern California to examine how consumers respond to nonlinear pricing. Contrary to the standard predictions for nonlinear budget sets, I find no bunching of consumers around the kink points of their nonlinear price schedule. I then explore whether consumers respond to marginal price, expected marginal price, or average price when faced with nonlinear water price schedules. The price schedule of one service area was changed from a linear price schedule to a nonlinear price schedule. This policy change lead to an increase in marginal price and expected marginal price but a decrease in average price for many consumers. Using household-level panel data, I find strong evidence that consumers respond to average price rather than marginal or expected marginal price. Estimates of the short-run price elasticity for the summer and winter months are -.127 and -.097, and estimates of the long-run price elasticity for the summer and winter months are -.203 and -.154. I conclude with "The Effect of Cash Rewards on Energy Conservation: Evidence from a Regression Discontinuity Design" to examine the effect of an alternative form of nonlinear pricing that was developed to provide an explicit financial incentive for conservation. In the summer of 2005, California residents received a 20% discount on their summer electricity bills if they could reduce their electricity consumption by 20% relative to 2004. Nearly all households automatically participated in the program, but the eligibility rule required households to have started their electricity service by a certain cutoff date in 2004. This rule generated an essentially random assignment of the program among households that started their service right before and after the cutoff date. Using household-level monthly billing records from the three largest California electric utilities, I find evidence that the rebate incentive reduced consumption by 5% to 10% in the areas where summer temperature is persistently high and income-level is relatively low, but the estimated treatment effects are nearly zero in other areas. To save 1 kWh of electricity, the program cost 2 cents in inland areas, 91 cents in coastal areas, and 14.8 cents for all service areas.

Bringing together leading-edge research and innovative energy markets econometrics, this book collects the author's most important recent contributions in energy economics. In particular, the book:• applies recent advances in the field of applied econometrics to investigate a number of issues regarding energy markets, including the theory of storage and the efficient markets hypothesis• presents the basic stylized facts on energy price movements using correlation analysis, causality tests, integration theory, cointegration theory, as well as recently developed procedures for testing for shared and codependent cycles• uses recent advances in the financial econometrics literature to model time-varying returns and volatility in energy prices and to test for causal relationships between energy prices and their volatilities• explores the functioning of electricity markets and applies conventional models of time series analysis to investigate a number of issues regarding wholesale power prices in the western North American markets• applies tools from statistics and dynamical systems theory to test for nonlinear dynamics and deterministic chaos in a number of North American hydrocarbon markets (those of ethane, propane, normal butane, iso-butane, naptha, crude oil, and natural gas)

We develop analytical models to investigate the economic behavior of consumers and firms, and apply them to conduct welfare analyses of environmental pricing schemes. We find that consumers tend to exert less effort than what firms aim to induce, with the social optimum located between them. In addition, the socially optimal choice for consumers is to participate when they face low or negative uncertainty, or high uncertainty with a significant environmental value of the saved energy, while non-participation is the socially optimal choice when they face high uncertainty with a low environmental value of the saved energy. To complement our theoretical results, we estimate the welfare loss resulting from consumers' overpaid effort. Our empirical analysis further demonstrates that participation occurs when consumers face low uncertainty, leading to increased utility, and that continuous participation by consumers plays a vital role in reducing energy consumption. However, we caution that continuous participation may not be sustainable in the long run, resulting in substantial welfare loss.

This dissertation studies the strategic behavior of major participants in electricity markets. The first chapter, Who benefits from ratepayer funded auctions of transmission congestion contracts? Evidence from New York, examines the participation of electricity retailers (firms that buy wholesale energy), electricity generators (firms that produce and sell wholesale energy) and financial traders (firms with no physical interests) in auctions for transmission congestion contracts. Transmission congestion contracts are derivative products that electricity retailers and generators can use to change their future wholesale electricity price exposure to a different location. U.S. Congress is concerned by large financial trader profits in auctions for these derivatives because the payouts are funded by ratepayers, not willing counterparties. I study firm-level positions in the New York Wholesale Electricity Market to investigate the causes of this concern. I find that some financial traders earn systematic profits when they buy illiquid products, potentially improving liquidity and price signals on these and related products. Given that electricity retailers buy so few of these products, the potential benefits resulting from trader actions are discussed. The second chapter, Tax induced emissions? Estimating short-run emission impacts from carbon taxation under different market structures, studies the strategic responses by electricity generators in the Western Australian wholesale electricity market following the introduction of a carbon tax. I find that the introduction of a carbon tax increased short-run carbon emissions in this imperfectly competitive market. The unique feature of the Western Australian setting is that the same carbon tax was introduced and later repealed, but the market structure differed at each event. At the repeal event, the dominant firm had less incentive to exercise unilateral market power. Then, the opposite result is observed -- emissions were lower with the tax. I show how the short-run impact of pollution taxation in imperfect markets depends on production technologies, market structure and the size of the tax. In the final chapter, Promoting energy efficiency in emerging economies through consumer education: Results from a field experiment in Mexico, I study (with co-authors Ognen Stojanovski, Mark Thurber, Frank Wolak and Juan Enrique Huerta Wong) how households responded to an informational treatment on electricity pricing that was offered to randomly-selected households in Mexico in Puebla. The 20-minute, in-person treatment was designed to educate households on how their electricity use translates to money spent on their electricity bill, and was free of normative content. On average, households receiving the treatment reduced electricity use, especially those that faced the highest marginal prices in the nonlinear electricity tariff. The estimated impacts were durable, with no observed rebound for at least a year. In addition, the magnitude of electricity use reductions was largest for those with less educational attainment. Our intervention was tailored for an emerging economy setting, was cost-effective in regions with low labor costs, and was met with high acceptance rates. These results emphasize the importance of removing information barriers in transitioning economies that are restructuring their energy sectors.

Electricity Pricing In Transition is written to address the new issues facing utilities, retailers, regulators, and customers in the changing electricity market. It is organized into five sections. Section I deals with the new restructured organization that has emerged from yesterday's vertically integrated, regulated monopoly company. Section II deals with issues in competitive pricing. Section III reviews the role of demand response and product design in today's chaotic marketplace. Given the single importance of California's energy crisis and the fact that it will be studied for years to come, Section IV is devoted to studying the lessons learned from this crisis. The final section of the book deals with markets and regulations. This book will provide practitioners with guidance on how to avoid the major pitfalls in pricing electricity while the market is in transition by drawing upon the insights and lessons learned from the experience of others that are documented in this book.

Understand the electricity market, its policies and how they drive prices, emissions, and security, with this comprehensive cross-disciplinary book. Author Chris Harris includes technical and quantitative arguments so you can confidently construct pricing models based on the various fluctuations that occur. Whether you?re a trader or an analyst, this book will enable you to make informed decisions about this volatile industry.

Electricity markets are being deregulated or face new regulatory frameworks. In such changing markets, new pricing strategies will need to consider such factors as cost, value of service and pricing by objective. Pricing in Competitive Electricity Markets introduces a new family of pricing concepts, methodologies, models, tools and databases focused on market-based pricing. This book reviews important theoretical pricing issues as well as practical pricing applications for changing electricity markets.