Snow and Ice Expenditure Stabilization and Cost Savings Using Weather Hedges and Insurance

Annual winter maintenance operations totaling approximately $2 billion nationwide account for a significant percentage of state, county, and municipality highway maintenance budgets. A key challenge is dealing with weather variability, especially weather extremes. Maintenance organizations have many strategies to mitigate the impacts of this variability and to balance workloads from year to year. However, for the most part, these strategies are not designed to deal with uncommon occurrences in a manner calculated to address risk of abnormal costs. As new financial markets have emerged, new techniques have been developed to manage weather variability and risks that can result in significant cost savings to transportation departments. The electric utility industry and other economic sectors are now using weather hedges to stabilize costs and revenues, and in some cases, to achieve net savings. This paper discusses the potential of weather hedges involving derivatives of weather and agency cost data to stabilize and potentially reduce costs of winter maintenance. Also briefly discussed is the purchase of insurance as an alternative to weather hedges. To make weather hedges feasible and acceptable to maintenance managers, executives, administrators, and financial officers in transportation agencies, as well as elected officials, several barriers must be overcome. It is estimated that weather hedges or insurance can potentially reduce net outlays for snow and ice control by 10 to 20 percent of winter maintenance costs in years in which the number of annual snow events would be expected to exceed the mean by one standard deviation.