Ask Ed Bell about energy trading and risk management (ETRM) technology and he’ll likely bring up his days with Enron back in the early 1990s. Bell—now a principal at Houston-based technology...
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.