Water is as weather-dependent a business as there is. In wet years, customers buy less water for their lawns. In dry years, sales may increase as customers make up for too little rain—but if the dry spell lasts too long, drought restrictions can quickly reverse revenue gains. Weather affects costs as well—periods of drought may require a utility to turn to expensive alternative water sources. Extreme wet weather such as Superstorm Sandy in New York in 2012 or the torrential rains in Colorado in 2013 can lead to expensive and unplanned operation and capital expenditures.
Yet rain or shine, water providers have to cover the costs of infrastructure to deliver a certain level of water service. When sales revenue drops or new weatherrelated costs appear, budgets can suddenly be out of balance, and utilities have to make up the difference by cutting essential expenditures, pulling from reserves, or increasing rates. Other capital-intensive, weatherdependent sectors manage natural volatility by moving some of that risk off their balance sheet. Should water providers do the same? We find that transferring weather risk could indeed reduce economic uncertainty for both water utilities and customers. This article demonstrates the potential terms and pricing of a weather risk transfer contract for a utility to mitigate flood risk.