Many utilities engage in hedging to protect customers from price spikes. But unless regulators are involved in crafting and monitoring these programs, they can turn into speculative ventures that...
The Weather in the Details
Why have utilities lost millions of dollars on weather-normalization plans? Blame deprecated NOAA calculations.
The views and findings expressed herein are solely those of the authors and should not necessarily be attributed to PSE.
A hypothetical Northwest utility with a revenue requirement of $50/MWh to $90/MWh and weather sensitivity on the order of 500 MWh to 800 MWh per degree-day would expect revenues to rise by roughly $45,000 for each additional heating degree-day experienced per annum. Reliance on National Oceanic and Atmospheric Administration (NOAA) standard measurements results in approximately 77 additional heating degree-days of weather adjustment as compared with using hourly average heating degree-day measurements.
In other words, NOAA’s measure of heating degree-days between a normal 30-year period and a given test year is consequently too high by 77 degrees when compared with the more accurate hourly estimates for the 30-year period and for the test year. In this case, the hypothetical utility would see a revenue shortfall of between $2 million and $5 million.
Put another way, NOAA’s measure of heating degree-days would yield extra weather normalization of roughly 25 percent, with rates being set too low by similar magnitudes. This shortfall is likely to be larger for gas utilities, where the weather sensitivities are greater, and larger in temperate regions where this difference between NOAA and average hourly heating degree-day is magnified.
In our study, we analyzed hourly temperature from 1971 through 2005, measured at Washington’s Sea-Tac Airport. 1 There were 306,816 such hourly temperatures. We calculated the skewness for each day in this period (daily skewness), as well as the mean daily temperature and the mid-range temperature. All temperatures were recorded top-of-the-hour by NOAA. We then calculated daily heating degree-days comparing the D a and Dm measures (average based and mid-range based). The temperature distribution was found to be positively skewed, with a greater likelihood of warmer extreme temperatures than colder extreme temperatures. Heating degree-days were lower by 100 to140 degree-days per year (depending on the month) using the mid-range estimate as compared with the mean. Skewness in the temperature distribution, therefore, causes the average to be underestimated by 10 to 15 degrees. As the mid-range is larger than the true average temperature, the base temperature less the mid-range estimate typically is smaller than the difference between the base temperature and the true average temperature. For the period 1971 through 2000, the estimate of heating degree-days based on the mid-range (average of minimum and maximum top-of-the-hour temperatures) is 4,817 on an annual basis. This is 125 degree-days lower than the estimate based on the true average.
We examined actual hourly temperatures to compute the hourly degree-days and found that for the period 1971 through