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Temperature, Price and Profit: Managing Weather Risk

Fortnightly Magazine - September 1 1998

be used within a well-managed risk management program. I think what's made weather risk so popular is that it requires no new or special education or training. Utilities have always understood degree-days when they look at their loads and they already have the data."

A glance into the possible future of weather risk management could include: (1) involvement of end-users (residential and industrial, retail and wholesale), (2) an international market for weather derivatives, with participation by many industries (film, pipeline, manufacturer, etc.), (3) long-term transactions, and (4) broader and more custom-tailored terms.

"The next eight months is a critical time period," says Tom Kloza, editorial content director at Opis Energy Group, a Lakewood, N.J., energy information and consulting company. "If this is a humdrum, normal season, I think it will do a lot of damage to weather hedging. But if this winter features extremes like last year, it will galvanize the futures markets."

Roxane Richter is a freelance writer based in Seabrook, Texas. She writes frequently on energy issues.

Sunshine, for a Price Marketers offer a rainbow of weather-risk products.

n Aquila Energy (, a UtiliCorp United Co., offers GuaranteedWeatherSM financial option products, including: guaranteed precipitation, snowfall, snow depth, average temperature, cooling degree-days, maximum temperature, heating degree-days, minimum temperature, unit contingent (generating unit operations) and forecast (five day). Products to be introduced in the future will include wind speed, gust speed and guaranteed sunshine.

n Dynegy (, formerly NGC Corp., offers Storage Investment InsuranceSM (price protection against falling gas prices) and Gas Purchase ProtectionSM (protection against future gas price increases). Based on customer need, the company also offers other weather-based product solutions.

n Environmental Dynamics Research Inc. (, a Palm Beach Gardens, Fla., consultant group, provides option design and valuation, analysis, trading and hedging strategies, value-at-risk analysis and portfolio evaluation.

n Enron Capital & Trade Resources ( offers maximum and minimum temperature, rainfall, stream flow/water level, cooling and heating degree-day weather financial instruments. Also available are wind, haze/pollution, sunshine and misery (accumulation of heat and humidity index) products.

n Koch Industries Inc. ( offers weather-related financial products for swaps, collars and floors involving heating degree-days and cooling degree-days. It also barters weather risk products for physical energy assets. Precipitation and weather risk management products will be available later this year.

n LG&E Energy Marketing ( ) offers WeatherGuard swaps, options and collars.

n Natsource Inc. ( is a New York institutional energy broker involved in weather hedging markets and arranging weather transactions.

n Trade Winds ( ) provides weather forecasts and weather-related commodity reports (including "Weather Trading Made Easy") for the world's major crop and energy regions.

n Weather Derivatives (, based in Belton, Mo., tracks weather for energy markets.

n WeatherWise USA LLC ( is a Pittsburgh underwriter of consumer weather risk. It offers WeatherProof Bill, a product which caps commercial, institutional and residential heating and cooling costs and allows consumers to pay a predetermined, guaranteed amount for energy usage. - RR