Hedging Rules for the Operation of Lake Okeechobee in Southern Florida

Lake Okeechobee is the major source of freshwater in Southern Florida. With the increasing possibility of water stress, determining how to manage water during drought periods is essential to the operation of the Lake. This study deals with operational problems related to the management of Lake Okeechobee and the challenges involved in the implementation of hedging policy. We examine the implications of applying a theoretical hedging rule approach, comprising inter‐ and intrayear models, for the management of Lake Okeechobee and explore several optional hedging policies. The results demonstrate that hedging rules could reduce profit loss particularly under serious water stress, and might be applied sooner to mitigate the risk of severe water shortages. We suggested that the management of Lake Okeechobee should consider both short‐ and long‐term hedging nested. It is also demonstrated that the practical applicability of rolling decision making with updated forecast. Based on the results of the model, the merits of explicit optional hedging rules are demonstrated.