Introduction:

In the presented case, managerial need is to forecast the WAPDA bill for a house in
Nathia Gali for year 2011. We know that an electricity of any infrastructure depends
on multiple factors. These factors include number of people in the building,
consumption of electricity, electricity tariff, temperature and many other factors.
Below are some key points/assumptions regarding the data provided for this specific
case:

Monthly bill is given, which is product of consumption and tariff for the
period. As all three data points are given, we will be accounting only one of
these. I have used consumption of electricity to forecast monthly bill.

Tariff increases by Rs. 0.25 every year. By this we know that tariff for 2011
will be Rs. 4.50/-

Temperature, heating days and cooling days are also dependent on each other.
As temperature falls below 65 F, heating days occur and if temperature
increases from 65 F those days are categorized as cooling days.

Average temperature is also the same for the last 30 years. This model
assumes that if we know the month, we will know the temperature.

Circular reference is present between heating days, cooling days and

temperature and between electricity bill, tariff and kW/h consumption.

Correcting the Data:

A deep analysis of this data shows that there are 3 missing values, which must be
calculated before going further with the calculations. These values were:

Observation No. 37: Data for monthly bill and consumption for January 2004
is missing. Out of multiple ways to calculate this point, I used de-seasonalized
values to forecast the consumption for January, which came out to be 3,579
kW/h (without adjusting back for seasonality factor). Multiplying this with
tariff (Rs. 2.75) gave monthly bill of Rs. 9,842.82.

Observation No. 89: Data for monthly bill and consumption for May 2008 is
missing. Same calculation methods were applied again to forecast and
consumption came out to be 3,855 kW/h. Multiplying this with tariff for 2008
(Rs. 3.75), monthly bill came out to be Rs. 14,456.39.

Observation No. 108: Data for temperature for December 2009 is missing.
Temperature has remained same for the past 10 years and we have used the
same value of 33.5 F in December also.

Forecasting using Regression Analysis:

For the year 2011, first I used regression analysis for forecasting the monthly bill.
Before starting the analysis, I defined the dependent/unknown variable and multiple
independent/known variables. Keeping in view the basic requirements for selecting
these variables, I chose monthly consumption as the unknown variable. As explained
above, tariff for 2011 is Rs. 4.50/- if we can calculate the consumption, we can easily
calculate the monthly bill.
Unknown Variable:
Basic requirement for selecting the unknown variable is that it must satisfy our need.
As described above, monthly consumption perfectly fulfills this requirement. We also
need historical data for this variable, which we have from 2001 till 2010.
Known Variable:
I redefined some of the variables as dummy variables; details for which are below:

Meter: When old meter was installed, I have categorized it at 0 and 1 when
meter was changed.

Heat Pumps: When both pumps were old, I defined it as base variable and is
given a value of 0. When pump A is new and B is old, value of 1 will be given
and when both pumps are new, value of 1 will be given to both new pumps
and variable pump A new, pump B old will take the value of 0.

Months: All the months have been categorized as dummy variable with
December as base variable.

Before moving forward I assumed that month, heat pump, electricity meter and
temperature determine consumption, which is our dependent variable. As temperature
remains the same for each month, like 30.1F for January, 64.7F for May and so on
for all years, if we know the month, we also know what temperature is going to be.
Subsequently heating and cooling days can also be calculated. Effect of consumption
cannot be identified on a yearly basis as number of family members and change of
electricity meter has had an effect on the consumption output. Due to the limitations

on the data points after the meter was changed, I could not do a proper analysis only
on the new meter.
A glimpse of finalized variables is presented below.

As regression analysis is used for forecasting, we do not need to check for

multicollineriaty.
After defining the variables the first regression analysis was conducted with following
results:

To check for the validity of the model, first we check the R2 in the first output. Here it
is 0.663. It means that months, heat pump and electricity meter explain 66.3% of the
variation in monthly consumption. Further going on with the analysis we see that
when testing for individual variable using t-Test in above figure, we see that against
the p-value of 0.05, months April and May are insignificant. These variables are not
statistically significant.
Next step is to clear these variables and again run the regression. This improved
model showed following results.

R2 for this model has decreased from 66.3% to 65.4%. Now electricity meter, heat
pump and months explain 65.4% of variability in monthly consumption.

To further check for the viability of the model, we take F-test into account. At
significance value of less than 0.05, we see that this models significance is 0.00. We
can say that this model is statistically significant.

This above picture tells us the effect of each independent variable on the dependent
variable. Before analyzing the variables at individual level, first we need to check
again for the t-Test. At p-value of 0.05, we can see that significance of all these
variables is less than 0.05. This shows that now all variable are statistically
significant. These variable are explained below:

Heat Pump (A New, B Old) shows that with comparison to base variable,
when both heat pumps were old, when heat pump A is changed, electricity
consumption drops by 2484.890, keeping all other variables constant.

Heat Pump (Both New) shows that with comparison to base variable, when
both heat pumps are changed, electricity consumption drops by 3706.852,
keeping all other variables constant.

Independent variable Jan shows that with respect to base variable December,
electricity consumption increases by 1547.225, keeping all other variables
constant. It also goes for February where electricity consumption increases by
3169.404. In August, with respect to base variable, electricity consumption
decreases by 1375.596, keeping all other variables constant.

Following regression can be developed by above model, which has been used to
forecast the results for 2011.

Consumption = 4471.332-2484.890(Heat Pump (A Old, B New))-3706.852(Heat

Pump (Both New))+2224.121+1547.225(Jan)+3169.404(Feb)+1754.204(Mar)1835.996(Jun)-1358.196(Jul)-1375.596(Aug)-1902.008(Sep)-1929.112(Oct)1986.212(Nov)
Results for 2011 forecast from above equation are shown below.

Monthly bill values are different which can be attributed to variables not included in
calculating consumption. This may be due to differing temperatures, as temperature
increases in summer months, monthly consumptions fall.

Classical Decomposition of Data:

There are multiple ways to forecast values. One method is regression, which is
explained above. Another one is classical decomposing. In this technique, data is decomposed in different parts. By this way we check for effects for seasonality, trend,
cyclical trends and unexplained variation. Here I have used trend and seasonal factors.
As data is same for the past 30 years (temperature), cyclical trend cannot be
calculated. Irregular variation has also been excluded, as it cannot be factored in
forecasting. As both methods are different, results from both methods are also
different. Estimated total bill from regression method is Rs. 143,803/- and average

monthly bill is Rs. 11,984/- While estimated total bill from de-composition method is
Rs. 87,329/- and monthly average is Rs. 7,277/Difference in both methods can be explained because in de-composition, data is used
after adjusted for seasonality factor and general trend. While regression uses actual
relationship between known and unknown variables to forecast values, decomposition
does not take all these variables and so is the variation in results.

Explaining the Seasonal Indices:

While forecasting through classical decomposing we calculate seasonal index/indices.
These are factors that explain the variation in the data occurring within a span of once
year. Following are the seasonal trends for the data provided.

Interpretation regarding these seasonal indices is as follows:

In January, electricity consumption on average is 57% higher than other

months due to seasonality factor.

In May, electricity consumption will be 1% higher on an average, than other

months due to seasonality.

In July, electricity consumption will reduce by 41% as compared to other

months due to seasonality factor.

In November, on average electricity consumption will be 46% lower than

other months due to seasonality factor.

Estimating Through Exponential Smoothing:

Another method to forecast is to use exponential smoothing. In this process, all the
previous values impact the forecasting outcome. An exponential figure, known as
(alpha) is used. We multiply this by previous time periods and 1- with previous
time periods forecasted value. Equation for this exponential smoothing is as follows:
Ft+1=(*Yt)+(1-)*Ft
Results of the equation are:

Using this method, with the lowest MSE is selected. Here lowest MSE was when
=0.7. Unit consumption of electricity using this method is 1,163 kW/h and electricity
bill will be Rs. 5,234/-

Different methods of forecasting have been described and explained above. Of all
these methods, in my opinion best method is regression as it not only shows the
relationship between the variables but also caters to the increasing or decreasing
trends.