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How electricity price changes are measured in the CPI

Electricity had an expenditure weight of 3.29 percent of the Consumers Price Index (CPI) as at the June 2006 quarter, making it one of the more highly weighted of the goods and services in the basket. This article outlines how changes in electricity prices are collected, calculated and weighted for the CPI.

Position in CPI structure

The following table shows that the electricity class falls within the housing and household utilities group of the New Zealand Household Expenditure Classification used for the CPI.

Group, subgroup or class Level June 2002 quarter expenditure weight in CPI
(percent)
Housing and household utilities Group 20.02
Household energy Subgroup 3.82
Electricity Class 3.29

 

Price collection

Electricity prices and related information are collected quarterly by postal questionnaire. Questionnaires are sent to electricity retailers. The survey collects three sets of information:

  • Tariff schedules (quarterly)
    Tariff schedules for residential electricity customers in each line company area covered by the 15 CPI urban areas are collected, covering the period from the second day of the third month of the previous calendar quarter to the first day of the third month of the current quarter.
  • Customer numbers (quarterly)
    The total number of customers is collected as at the last day of the middle month of the quarter for each line company area included in the CPI.
  • Tariff plans and their use (annually, in December quarters, or when necessary for new entrants to the survey)
    The tariff plan options and the proportions of residential electricity customers using them in each of the line company areas covered by the CPI are collected as at 30 November of each year. This information is used to select representative tariff plans to price and to determine their relative importance.

Tariff schedule information is collected up to and including only the first day of the third month of each calendar quarter, to allow respondents time to supply the required information and for Statistics NZ to compile the information collected in time for inclusion in the CPI (usually released by the eleventh working day of the month following the quarter). Electricity tariff changes are often effective from the first day of a month. When this happens in the third month of a calendar quarter, the change will be reflected in the CPI for that quarter. If a change happens after the first day of the third month of a quarter, it will not be reflected in the index until the following quarter.

All electricity retailers operating in the 16 line company areas covering the 15 CPI urban areas are surveyed.

Estimation

Although prices are collected once each quarter, they are calculated monthly, taking into account the actual dates that tariff changes occur. For example, a tariff change half way through the middle month of one quarter would be reflected partly in the middle month and fully in the third month of that quarter. After aggregation to the quarterly level, the tariff change would be reflected partly in that quarter, with the remainder being reflected in the following quarter.

Electricity tariffs are not linear. Households are generally charged a fixed amount (for example, a fixed daily charge irrespective of use) in addition to a rate for each kilowatt-hour used. To robustly measure price change in cases where tariffs are not linear, it is necessary to track changes in the costs of representative levels of use. For example, if there was an increase in a fixed charge not related to use but no change in the rate per kilowatt-hour, then households would experience different changes in costs depending on their respective levels of use.

Monthly domestic electricity prices are calculated by using three regional electricity levels of use (low, medium and high) for each line company area. The levels of use selected for each line company area represent the full range of use by households and are based on information obtained from retailers about the distribution of use by domestic consumers. Price change is measured by calculating:

  1. monthly costs (inclusive of any prompt payment discounts) for commonly used tariff plans, using the three electricity levels of use for each electricity retailer
  2. average monthly cost for each retailer by weighting the costs of different tariff plans by the proportion of domestic customers on each plan and the proportion of customers representing each use level
  3. average monthly cost for each line company area by weighting together the average prices for retailers by retailer customer numbers
  4. average monthly cost for each CPI urban area by weighting together the average quarterly costs of each line company area within the CPI urban area (this step is applicable to only one of the CPI urban areas)
  5. average quarterly cost for each CPI urban area by weighting together the average monthly costs by the numbers of days in each month
  6. the quarterly electricity index for New Zealand by weighting movements in the quarterly average costs for CPI urban areas by the CPI regional population shares.

Tariff plans are reweighted annually to reflect changes in availability and changes to the relative importance of tariff plans. Updated tariff plan weights are linked in and first used to calculate movements from the December quarter to the March quarter of each year.

Each retailer is weighted by its number of domestic customers in each CPI urban area. Retailer weights are recalculated each quarter and used in the calculations in a way that the index reflects any shifts in customer numbers between retailers within a CPI urban area as price change.

Price changes

The CPI electricity index reflects the following price changes:

  • retailers changing tariff rates
  • customers shifting from one retailer to another (when the two have different tariff rates)
  • a change between summer and winter rates
  • retailers changing, introducing or removing prompt payment discounts.

Some tariff plans in some South Island CPI urban areas have lower summer and higher winter rates. This can have a small upward influence on the electricity index for New Zealand in June quarters (and to a lesser extent September quarters) and a small downward influence in December quarters.

Back to Price Index News: April 2007

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