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
