Case Studies: Quantitative Analysis
Rate Simulation Model
Aether helped its utility client study the impact of hedging strategies and deferral account mechanisms on the customer energy cost. It built the model to calculate the energy cost in a per unit measure, and structured the model to use different price perspectives such as: historical prices, forward market prices, and/or “what if?” price scenarios.
The energy cost per unit calculation took into account the client's deferral account balance, the difference between the prior energy rate and the actual energy cost during the prior period, and the change in the forward market price relative to the current rate for a defined future period. The actual energy cost included energy purchased at spot market prices as well as the gain or loss of physical and financial hedges.
Both hedging strategies and alternative deferral account structures were tested together. Additionally, the Model accommodated dollar cost averaging strategies and opportunistic hedging with price triggers strategies. Hedges were developed for fixed price instruments, put and calls, and complex option structures.
Aether’s client was a west coast refined products distributor that wanted to understand how trending markets impacted retail margins. The client’s retail sales included rack sales, index sales, and fixed price forward sales in a variety of market locations. Product was sourced from U.S. and Asian refineries as well as from inventory in storage.
Aether built a number of correlation and regression analyses that considered a number of factors: how margin changed as refined products fixed prices changed, how the regional basis related to margins, and to what degree margin changed whether the market was in contango or backwardation. The analysis looked at each major market location where the client supplied customers.
Additionally, Aether analyzed ‘early warning’ signs that could impact the client’s future retail margins. Aether modeled the impact of imports, refinery runs, and inventory levels on western refined products' basis markets. This provided valuable insight to key drivers of of gasoline and diesel prices during different seasons.