No Risk, No Reward

A big chess game. That's just what weather forecasting is about. It's a science rooted in educated guesses about a swirling, constantly changing mix of conditions. People can't control the heat or when and how much it rains. But we've learned a lot about forecasting those conditions and about softening their financial impact. In effect, we've taken the risk out of weather risk.

For one thing, we have made enormous advances in climatology. "Eight or 10 years ago, long-range forecasts just weren't possible with today's level of accuracy," says Joel Myers, founder and president of AccuWeather, the company that sells Stevens Transport its weather data. Since then, scientists have figured out how important oceans are -- and have employed more and better satellites to gauge water temperature. Using computer models, they can produce 15-day predictions for increasingly intimate slices of the globe. "These forecasters can look at their radar," Moore marvels, "and see the very spot where one of our trucks is."

In the past five years, Wall Street has developed instruments that can hedge the business risks associated with weather. In part, such products are a natural progression in the explosion of financial derivatives. But those products have also been made possible by the Web, which allows rapid access to the historical data needed to create models.

Lynda Clemmons and her colleagues first started thinking about weather hedges in 1996, when they were working on a utility acquisition at Enron. There was no way, they learned, to protect themselves against the financial impact extreme weather could have on revenue. So they developed a product that paid more for power as the temperature rose -- something akin to a traditional call option.

Since then, Clemmons and her team have sealed a deal with Atmos Energy Corp. to protect the utility against mild winters. They also engineered an instrument that safeguards Elektrizitatswerk Dahlenburg, a German utility company, against excessive rainfall.