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Weather Risk Management for Regulated Utilities

Why hedging can make sense, even for companies covered by weather-normalized rates.
Fortnightly Magazine - October 1 2002
  1. predictions can impact the price significantly.
  2. Generally, when the weather is warmer than normal, declining block rates provide some protection to the revenue stream to the extent that the load falls off in the lower-priced tailblocks. Conversely, when the weather is colder than normal, flat commodity rates cause the revenue stream to increase at a greater rate than declining block rates.
  3. Another factor that could impact recovery is the asymmetric way a HDD is defined: positive if below 65 degrees, zero if above 65 degrees. Above 65 degrees it does not matter if it is 67 degrees or 71 degrees; both give rise to zero HDDs. Thus abnormally warm weather can be underestimated using a HDD approach.
  4. Conversely, in mild winters the utility may over-collect from customers.

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