Hedging rule for reservoir operations: 1. A theoretical analysis

Hedging rule policies for reservoir operations accept small deficits in current supply to reduce the probability of a severe water shortage later. This paper expands a theoretical analysis and develops a conceptual two-period model for reservoir operation with hedging that includes uncertain future reservoir inflow explicitly. Extended analysis of the model properties and influencing factors is presented with a general utility function, addressing (1) the starting and ending water availability for hedging, (2) the range of hedging that is related to water demand levels, (3) inflow uncertainty, and (4) evaporation loss. Some intuitive knowledge on reservoir operation is proved or reconfirmed analytically; and new knowledge is derived. This theoretical analysis provides an updated basis for further theoretical study, and the theoretical findings can be used to improve numerical modeling for reservoir operation.