Aquila Energy has won a five-year weather hedge contract toserve the Sacramento Municipal Utility District, a move designed toprotect the California utility from the combined effects of lowprecipitation and the wide swings in electricity prices now facedby other communities in the state.

The Sacramento Municipal Utility District (SMUD) provides powerto 511,000 customers in the capital city area from a system withabout 700 MW of hydroelectric generating capacity, and its annualpower purchases are keyed on annual rainfall.

Under the terms of the Aquila contract, in dry years, when lesswater flows through SMUD’s hydro plants, Aquila will pay SMUD up to$20 million. The lower the precipitation, the larger the payment.The payment also will increase as the prevailing market prices forelectricity rise. These payments may then be used to offset powerpurchase costs.

In wet years, when SMUD produces more power, it may pay Aquilaup to $20 million using the dry year formula. Over the life of thecontract, payments are capped at $50 million.

Precipitation will be measured on the watershed of the upperAmerican River, which drains into the SMUD reservoirs serving thehydroelectric plants. Electricity payments will be based on theCalifornia Power Exchange prices in Northern California — pricesthat have been highly volatile this summer.

“This is a hybrid product, containing elements of power andweather,” said Jon Cassity, director of power marketing for KansasCity-based Aquila Energy. “We’ve found that many of our customerscan manage the risks of high power prices or adverse weather.However, the combination of the two can devastate earnings. Ourgoal is to design products like this which will help utilitiesbetter manage these risks and make a successful transition to thecompetitive marketplace.”

Aquila Energy, a subsidiary of UtiliCorp United, issued thefirst weather derivative hedge in August 1996. Today, about $2billion to $3 billion worth of weather hedges are sold around theworld for all kinds of industries, and Aquila markets more than 30different products under its GuranteedWeather r brand. Its website, GuranteedWeather.com, also allows customers to calculate thefinancial benefits of hedging their own business.

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