Why have utilities lost millions of dollars on weather-normalization plans? Blame deprecated NOAA calculations.
Jeffrey A. Dubin is Visiting Professor of Economics at the University of California, Santa Barbara and Professor of Economics at the California Institute of Technology. He also is a co-founding partner of Pacific Economics Group. Contact Dubin at firstname.lastname@example.org. Villamor Gamponia is an economist at Puget Sound Energy (PSE). Contact Gamponia at villamor. email@example.com.
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.