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

Johnson said variances in customers’ bills and price spikes in1996 and 1997 caused interest in a reliable and steady bill. Thepressure caused the LDC to consider a billing format that chargedthe customer the same amount even if the weather fluctuated. KansasGas initiated a pilot program in September of 1998 and offered aweather-proof bill to 78,000 of its customers. They communicatedthe plan through a series of bill inserts, telemarketing venturesand radio advertisements. Of the customers involved in theprogram, 10% signed up.

“Those several thousand people have been happy with the service.Even though the warm winter caused their bills to be higher thanthey normally would have been, people understood why they werehigher. We were happy with the sign-up rate and the program’ssuccess pushed us to start offering the billing option to all ofour customers,” Johnson said.

Johnson said that an added bonus of weather-proof billing isthat the LDC did not have to account for the signed-up customerswhen buying conventional weather derivatives. “By paying that fixedamount, they already are hedged.”

David Zabetakis, a representative for Weatherwise USA, a riskmanagement group focused on weather-based products, saiddistributors have a lot to gain from offering a weather-proof bill.”The provider gets a guaranteed amount every month, and people whosign up to the program stay on it.” One of Weatherwise’s servicesis aiding companies that want to implement this type of billingmethod. Zabetakis said the billing option is being offered in eightstates presently and will spread to 14 states by September.

None of the panelists would guess as to how much weather-relatedproducts, such as heating degree-day or cooling degree-day calls,put or swaps would grow. “The weather derivative market has grownexponentially,” said Jeff Porter, a member of the Koch WeatherDerivatives Group. “There have been roughly 1,600-1,700 tradesindustry-wide since 1997 when Koch and Enron entered into the firstderivatives contract. That is pretty strong growth. Its notunimaginable growth, but its pretty strong. Where it will go,however, is anybody’s guess.”

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