Competitive energy suppliers are infuriated by Michigan’s regulatory framework. The state partially unbundled its utilities, but left generation tied to retail operations. Then it opened the...
The Weather in the Details
Why have utilities lost millions of dollars on weather-normalization plans? Blame deprecated NOAA calculations.
2000, there were 5,093 heating degree-days on an annual basis (method D). Using the daily average of such hourly temperatures lowers the estimate to 4,942 heating degree-days (method D a). Using the mid-range estimate of the mean degree temperature published by NOAA further lowers the estimate to 4,817 heating degree-days (method D m). There is a further difference of 20 degree-days to get to the published normal of 4,797 due to NOAA errors, spline adjustments, and rounding. Hence, heating degree-days are underestimated by 0.4 percent due to miscellaneous adjustments, 2.6 percent due to the difference between mid-range and daily average temperature, and a further 3.1 percent due to the difference between daily average temperatures and hourly based estimates. The conclusion is that:
D $ D a $ D m.2
The NOAA method relying on the mid-range produces an estimate of heating degree-days that is significantly lower than actual hourly degree-days.
With respect to weather normalization and rate making, an important consequence of these results is that a smaller degree-day adjustment should be expected between normal periods and test-year periods when using actual hourly degree-days as compared with the difference between normal and test-year using the mid-range average (NOAA method). The reason for this is that the averaging that occurs in forming a normal (30-year average for each month of the normal year) is likely to narrow the difference between the mid-range and average temperature. For instance, using the period of 1971 through 2000 as the normal period and October 2004 through September 2005 as the test-year period, we found that the adjustment between the NOAA normal and the test year is 344 degree-days, but is only 275 degree-days using daily average temperatures. Using the more accurate hourly based estimate implies a difference of 267 degree-days.
The data requirements for calculating degree-days by more precise techniques are minimal. We conclude that an accurate weather adjustment in the rate-making context requires accurate estimates of heating and cooling degree-days. Until NOAA adopts an alternative calculation methodology, our specific recommendation is that electric and natural-gas utilities adopt an hourly or average based measure of heating degree-days when comparing normal and test-year periods in rate-making proceedings. Rote reliance on NOAA calculations leads to excessively large weather adjustments in typical situations.
1. Sea-Tac Airport is a “first-order” weather station with largely complete and accurate historical temperature information.
2. Our results apply to hourly-degree-days as well.