I am looking for some advice/critiques...Retail electricity portfolios provide an interesting hedging issue (for me anyway) as load and price are positively correlated. I have worked through the math myself and also worked through several articles (for example, "Volumetric Hedging in Electricity Procurement" by Oum, Oren, and Deng) and my current understanding is that the correlated structure provides an optimal hedging structure when using options. Quickly, the options allow a curvilinear fit of the non-linear structure implied by the positive correlation between load and price.The company I am currently working with calculates a quantity, LL, that is the price weighted average load, LL=sum(PL)/sum(P). This is the basis for their hedging philosophy. Typically, they hedge to LL - x*sigma(Load) with forwards. Then, they hedge to LL + x*sigma(Load) with calls (x is typically 1 or 1.5). I have two issues with this. LL is not the correct level to hedge to and the specific hedging strategy can actually increase the volatility of the portfolio because of the curvilinear fitting mentioned above.I finally get to my question...This company really believes in this hedging strategy; they feel it gives them flexibility and <relatively> cheap coverage, but I hate to see them losing money every month. Showing them the math will not persuade anyone, it will be brushed off as unrealistic. The only thing I can do is to use historical results (we have hourly loads and prices) to show that they are making sub-optimal hedging decisions. I am hoping to get some suggestions on how to present the historical results to be most persuasive. Edit: I should add that I am afraid if I just prepare a basic analysis, I will need an answer for the following response...It is just different because <something atypical> happened last month and, over time, we will be just fine.Any thoughts would be appreciated.

show them where they did sub-optimal hedging, how much it cost them, and what they should have done. try to stay away from getting too much into the details, atleast initially. otherwise you will lose your audience quickly. my 2c.

oops...sorry for the blank post; my computer is acting weird today.Nice to hear from you again. Sorry for the radio silence on the board; lots of stuff happening that is taking my time. We should IM soon and catch up.My issue is how do i do this? If I just show one month and the optimal hedge, their hedge, and the difference, I fear that I will hear something like "Yeah, but we had unexpected hot weather and that made the hedge suboptimal. Over time our hedges will work out just as we planned." I don't think that is true, but is hard to show using just historical data as we only get one "random draw" every month. Monte Carlo's won't work because they are dependent on underlying distributions and will be scoffed at.I guess my real question is the story I need to tell. How do I explain that finding the optimal hedge for one specific month and showing it is different from our "theoretical best hedge" for that month tells us a lot about the efficiency of the overall hedging philosophy and is not particularily tied to the peculiarities of that month?Maybe I'm grasping at straws here, but I don't think we in the industry do a particularly good job explaining to execs what the answer is in everyday english. Someone once said that if a professor can't explain something to a 101 student, he doesn't really understand the issue himself. I am beginning to think I don't understand the issue because i'm not getting through to the execs.

execs like simple and systematic things. if the difference is marginal, they might not care.