Consumer Price Index

Improvements to CPI Procedures for Handling Refunds for Utilities

Effective with the calculation of the index for January 1999, the Consumer Price Index (CPI) will change its treatment of refunds for electricity, utility natural gas service, or other similar services when the refunds are based on earlier periods’ utility consumption amounts. (Other services potentially affected by this change include telephone service, local charges; water and sewerage maintenance; cable television; and garbage and trash collection.) The change will affect both the price indexes and the average prices computed by the CPI program.

On occasion utility companies or their regulators, which are usually called public utility commissions, determine that the companies have charged their customers more than the appropriate amounts in a past period or periods. This may occur, for example, when a regulator grants a utility company a temporary rate increase while an application for a permanent increase is pending. If the regulators subsequently deny the application, they may require the company to repay their customers for the excess payments made during the period the temporary rate was in effect. Other situations when utilities may issue refunds based on earlier-period usage result from lower than anticipated energy costs or from reevaluations of past rates with regard to the actual cost of providing service.

To compensate for past period excess charges, utility companies usually credit their customers’ current period bills. Under current CPI practice, the CPI utility indexes use the total refunded amount that the utility credits to its customers’ accounts in the month(s) that the refunds occur. When the refund is greater than the monthly charge, the CPI shows the remainder of the refund in the next months’ bills. Consequently, the price used in the CPI may be as low as zero and remain at zero or a very low level until the customer recoups the full refund. This practice has disadvantages. It makes the utility indexes rather volatile. In addition, it means that they do not reflect the actual current-period prices (for example, what new customers pay) for a utility service such as electricity.

Under the new procedure, the CPI will disregard any refund for past excess charges when it appears on residential customer bills as a separate refund credit that is subtracted from the charges for current usage. The CPI utility indexes for each month will be based only on the current rates—including temporary rates—that are in effect for that month. The movement of the CPI utility indexes will reflect all changes in rates—generally in the month they are effective. The rate changes may be permanent or temporary or they may be the rescission of temporary rate increases. However, the movement of the utility indexes will no longer reflect refunds resulting from such rescissions or similar causes. This change in procedures should reduce the month-to-month volatility of the utility indexes and make them reflect current prices and price trends more accurately.

This change will apply only to rebates of past excess charges that appear as separate refunds on customer bills. The CPI utility indexes will continue to reflect current period credits that are based on current period consumption; the most common of these are purchased gas or fuel adjustments.

The change will have no effect on the long-run movement of the CPI or its component indexes. It is expected to remove short-term variability in the CPI utility indexes and, to a lesser degree, to higher CPI aggregates. Annual average index levels may be slightly higher as a result of the change in procedure, depending on the frequency and size of future refunds.

For additional information on this change write to the Bureau of Labor Statistics, Division of Consumer Prices and Price Indexes, 2 Massachusetts Ave. NE, Room 3615, Washington, DC 20212-0001 or telephone Bob Adkins at 202-606-6985.

Last Modified Date: October 16, 2001

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