Experts say utilities' inconsistent approach to weather risk is costing them dearly.
Jennifer Alvey is associate editor of Public Utilities Fortnightly.
Energy companies know intimately that millions of dollars of their revenues depend on cold winters and hot summers. And while weather risk management tools—specifically, weather derivatives and weather insurance—have been available since the mid-1990s, some utilities do not seem convinced of their value.
Perhaps one of the most surprising examples is Duke Energy, whose first quarter profits fell 17 percent due to a mild winter and a weak economy that hurt demand for natural gas and electricity. Duke’s regulated utility earnings before interest and taxes (EBIT) declined a whopping $189 million in 2001 from the previous year. According to the company’s annual report, about one-third of that decline is attributable to “much milder weather” in the utility service territories during the last quarter of 2001.
But Duke is not alone in taking a hit in revenues due to a mild winter in 2001. In SEC filings, Aquila reported, “Key factors affecting lower first-quarter 2002 results were lower prices and volatility … also impacting results were warmer-than-normal weather.” Equitable Utilities, a subsidiary of Equitable Resources, had EBIT of $79.0 million for 2001, compared with $93.0 million for 2000. “Heating degree days were 5,059 for 2001, which is 10 percent warmer than the 5,596 degree days recorded in 2000 and 15 percent warmer than the 30-year normal of 5,968. The warmer weather had a negative year-over-year impact on net revenues of approximately $7.8 million,” the company said in a February statement.