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The Perils of Ignoring Mother Nature

Experts say utilities' inconsistent approach to weather risk is costing them dearly.
Fortnightly Magazine - May 15 2002

reinsurance market, which is hardening appreciably in the wake of Sept. 11, the same thing is not happening in the weather market after Enron's departure. Tobben says, "I think it is a signal that the players that are in the marketplace are there, and are strong, and are able to support the increased deal flow due to Enron's departure." He did note that one impact has been a lower level of activity in the secondary market, in certain places where Enron was very active such as counterparty to counterparty.

Like Clemmons, Tobben saw some slowdown in the European weather markets after Enron collapsed. But overall, Enron's loss has been Aquila's gain. "We've seen a tremendous uptick in the amount of end-user business and trading business that we've done since [Enron's] departure," he says.

Caifa says that he is hearing that much of the substantial, and now former, Enron desk is starting to disperse not only to existing players in the market, but also to other companies that are looking to get into weather risk.

Indeed, at press time, Duke Energy had just opened its weather derivative desk and executed its first transactions on the ICE, according to sources.

Sweetnam echoes the point, rattling off a list of new players that includes Constellation Energy Group. Perhaps the most significant new entry to the weather risk industry is Goldman Sachs, which in the fourth quarter of last year became the first Wall Street firm to offer weather hedges. "That was a very significant development, in terms of the investment banks coming in and also trading in this market," Sweetnam says. In addition to Swiss Re, several companies that had either downsized their weather operations or had never been highly active are currently increasing their activity, including Renaissance Re, El Paso, and Dynegy.

Weather Risk Crosses the Pond

Perhaps the real story about weather risk last year wasn't in the United States at all, despite the disappearance of Enron. Tobben says that there was a tremendous amount of activity in Europe in 2001. This is good news to Tobben. "We're seeing additional geographical regions come into the marketplace, which is prompting a tremendous amount of growth," he says. He attributes the growth in Europe to a few different factors. "There were a number of shops that just began to get off the ground in Europe over the last couple years. And the sales cycle-it takes some time to educate consumers about these products and get them to a point where they're ready to transact."

Also, Europe is opening up to electricity competition. Tobben says, "[t]hat's certainly a big driver in the energy space. We see, in addition to the energy players like ourselves, some of the other major players over there originating business. We also see the banks becoming very active in Europe as well, suggesting weather as a risk management."

"The European market is where we would have liked to have seen the United States go, in terms of the larger structured deals," Caifa says. Large European companies are looking at their gross weather