THE USE AND PERCEIVED FAIRNESS OF PRICE-SETTING RULES IN THE BULK ELECTRICITY MARKET

Prior research suggests that the perceived fairness of a price depends on the rule or formula used to set the price between a buyer and a seller. The frequency of use and fairness of four cost-based and four market-based pricing rules were studied in the buying and selling of bulk electricity. No potentially ''collusive'' consensus emerged about the price setting process in this market; no single rule dominated in perceived use and fairness. Rules based on market forces were perceived to be as fair as cost-based rules with two notable exceptions: the practice of raising price following demand increases, and the asymmetric treatment of cost increases and decreases implied by the ''Dual Entitlement'' principle were perceived to be significantly less fair. Evaluations of fairness of the different price-setting rules were moderated by traders' familiarity with and use of the various rules.