Cold Comfort
GRITIT’s Commercial Director Jason Petsch addresses the cold comfort annual conference where winter maintenance industry leaders and senior local council officers meet to discuss issues such as:
- Winter resilience planning and winter maintenance strategies
- Managing public expectations and criticisms
- Driver’s hour’s legislation
- Route based forecasting
- Current gritting and snow clearing treatments and future technologies
- Accuracy of weather forecasting
- Method and rates of gritting spread
- Current or potential salt delivery problem
Jason’s session focuses on the full cost of the last few winters: addressing the effects on the UK economy, and what can be done to better manage expenditure.
The 2010 winter brought severe winter conditions and snowfall and, again, Britain experienced crippling travel chaos resulting in widespread public criticism and local authorities being accused of lack of preparation as Britain, at times, virtually ground to a halt.
The Federation of Small Businesses has estimated the severe conditions cost businesses some £600million due to lack of gritting and snow clearing to keep on top of snow and ice.
The NHS reported an increase in accident and emergency cases – adding to an already pressured public service.
The Association of British Insurers reported an increase in claims.
In his address to the conference attendees, Jason looks at the co-dependency that exists between, loss of revenue to businesses (and the government in tax), the NHS, cost in insurance claims (and subsequent increase in premiums) and local authorities who are facing budget cuts alongside demands for maintaining public services.
It is clear that cutting gritting and snow clearing services to preserve budgets will just transfer the cost (and possibly exacerbate it) to other areas.
The government concern about the apparent trend of harsher winters was such that it commissioned a study at Reading University to gain an understanding of the future trend of snow and ice for Great Britain going forward. The overall picture for the British Isles is for the trend of harsher winters to continue for some time – at least for the next decade. With this in mind, slashing services in line with budgets is likely to be more harmful than helpful.
GRITIT’s commercial director, Jason Petsch has been looking at innovative ways to help county councils with the dilemma they face when trying to manage the rising costs of gritting salt, machinery, staff vs budget cuts and their corporate and social responsibility – in short there are great demands on ever diminishing budgets. Jason’s address shows that that managing budgets and stabilising costs can be achieved by using tried and tested weather certificates which are a financial derivative products.
He shares his knowledge of weather certificates (derivatives) and how they have been used by The United Nations World Food Programme and how, conversely, utility companies, closer to home, have protected their profits in times of warmer winters where the use of energy is lighter than expected.
So, in the same vein, organisations and councils can protect themselves against soaring costs precisely at times when more gritting and snow clearing services are called for during a harsh winter spell.
So, what is a weather certificate?
Weather certificates (derivates) are financial instruments used to reduce risk associated with adverse or unexpected weather. The difference from other derivatives products is the underlying asset (the weather) has no direct value to price the derivative.
Established in 1997
They were first established in 1997 with the first few transactions between Koch Industries and Enron and Koch Industries and PXRe and they took 18 months to develop. Since then they have been commoditised and over the counter (OTC) products have been developed by brokers such as Celsius Pro.
How do they work?
All weather certificates track weather changes such as drought, frost, heating degree days (HDD) and cooling degree days (CDD). A CDD contract could run from November to March and pay out a set amount per day that the temperature falls below the agreed limit.
How is it different from an insurance policy?
An insurance policy will provide cover for a one-time catastrophe or a natural disaster, a weather derivative provides you with additional protection from low severity, high-frequency events such as, rain, snow and temperature fluctuations.
Who uses them?
According to KPMG 80% of businesses are exposed to risks of weather. Typical industries that use weather derivatives are energy companies, agricultural producers, garment manufacturers, the tourist industry and insurance underwriters.
How could they work for a Council?
Perth and Kinross Council hit the headlines in February 2011 by overspending on gritting and snow clearing services by almost double their £2.8m budget – the expectation that their spend for winter maintenance would come in at some £5.5m
So how might a weather certificate have helped them?
If they’d hedged the risk of low temperatures or the level of snow the derivative pay out would have covered the cost of additional services enabling them to continue with a comprehensive gritting and snow clearing programme with no concerns regarding any over spend.
Without Weather Certificate With Weather Certificate
| Budget | £2.8m | Budget | £2.8m |
| Overspend | £3.1m | Cost of weather certificate | £756,000 |
| Total Spend | £5.9m | Total Spend | £3.5m |
Other ways to manage budgets
GRITIT has a range of service packages to give you complete control over your winter maintenance programmes and to help you to manage your budget.
If you would like more information about hedging your risk or would like to learn more about how you can benefit from any of GRITIT’s service packages please contact us on 0203 159 5270 or email us info@gritit.com