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Weather Derivatives Make an Impact in Kansas

Weather Derivatives Make an Impact in Kansas

Demonstrating the growing popularity of weather derivatives, Kansas Gas Service is on the brink of offering a weather-proof bill to all 600,000 of its customers, said Steve Johnson, executive director of corporate relations for the LDC. Johnson and a panel of weather derivative experts spoke on the growing use of weather products at Gasmart/Power'99 in Dallas yesterday.

Johnson said variances in customers' bills and price spikes in 1996 and 1997 caused interest in a reliable and steady bill. The pressure caused the LDC to consider a billing format that charged the customer the same amount even if the weather fluctuated. Kansas Gas initiated a pilot program in September of 1998 and offered a weather-proof bill to 78,000 of its customers. They communicated the plan through a series of bill inserts, telemarketing ventures and radio advertisements. Of the customers involved in the program, 10% signed up.

"Those several thousand people have been happy with the service. Even though the warm winter caused their bills to be higher than they normally would have been, people understood why they were higher. We were happy with the sign-up rate and the program's success pushed us to start offering the billing option to all of our customers," Johnson said.

Johnson said that an added bonus of weather-proof billing is that the LDC did not have to account for the signed-up customers when buying conventional weather derivatives. "By paying that fixed amount, they already are hedged."

David Zabetakis, a representative for Weatherwise USA, a risk management group focused on weather-based products, said distributors have a lot to gain from offering a weather-proof bill. "The provider gets a guaranteed amount every month, and people who sign up to the program stay on it." One of Weatherwise's services is aiding companies that want to implement this type of billing method. Zabetakis said the billing option is being offered in eight states presently and will spread to 14 states by September.

None of the panelists would guess as to how much weather-related products, such as heating degree-day or cooling degree-day calls, put or swaps would grow. "The weather derivative market has grown exponentially," said Jeff Porter, a member of the Koch Weather Derivatives Group. "There have been roughly 1,600-1,700 trades industry-wide since 1997 when Koch and Enron entered into the first derivatives contract. That is pretty strong growth. Its not unimaginable growth, but its pretty strong. Where it will go, however, is anybody's guess."

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