Understanding system loss

As someone who has been in the power industry for close to 40 years, lived through the worst power crises with blackouts lasting up to 12 hours, witnessed the reforms that reshaped the industry, and saw the birth of the Electric Power Industry Reform Act (EPIRA) in 2001, I firmly believe the current conversation on system loss deserves a deeper understanding.

Electricity is perhaps the only product we use every single day without ever seeing the very complex system that delivers it. We turn on a switch and expect that we get light. We rely on our refrigerators, air conditioners and gadgets to run without interruption. Only a few would even think about the massive and interconnected system that makes all this possible: the power plants that generate electricity, the transmission lines that carry it across the country, the substations, transformers and lines that bring it to our homes and offices. Not to mention the thousands of workers who keep everything running day and night. We rarely see any of them. What most consumers see is the monthly electric bill and understandably, that is where much of the attention goes.

That is why discussions about system loss are often prone to misunderstanding. The term “loss” by itself naturally creates frustration among many consumers. It is as if consumers are being made to pay for somebody else’s responsibility. The reality is actually more complex.

System loss comes in two forms: technical and non-technical. Technical losses are unavoidable and occur because of the laws of physics. Whenever electricity flows through power lines, transformers or other electrical equipment, a portion of that energy dissipates as heat. No electricity system in the world is completely free from technical losses. No matter where the utility operates, some amount of electricity is lost in the process of delivery.

Non-technical losses are different. These arise from electricity theft, illegal connections and operational issues. These can be minimized through stronger enforcement and better technology.

To understand why we are currently in this situation, we need to go back to 2001 when EPIRA was passed. The power sector was then grappling with shortages, financial challenges and the need for new investments. EPIRA reorganized the industry, encouraged private participation and introduced reforms that helped strengthen the country’s power supply.

But even before EPIRA, the country’s policy on system loss management had already been established under Republic Act 7832, which recognized that while some system loss is unavoidable in delivering electricity, only a limited portion should be recoverable from consumers through capped pass-through rates that gradually declined from 14.5 percent to 9.5 percent. EPIRA retained this policy but authorized the Energy Regulatory Commission (ERC) to adjust the allowable caps based on prevailing industry conditions and technical parameters set by law. That’s why the ERC subsequently reduced the cap for private distribution utilities first to 8.5 percent and later to the current 5.5 percent of feeder energy.

Over the years, these reforms helped move the country beyond the era of regular blackouts that many Filipinos like me grew up with and still remember.

Like many reform laws, EPIRA sought to balance consumer protection with a functioning power system. One provision allowed the regulated recovery of system losses – an issue that has become an important part of today’s conversation on power costs.

But what is often missing from today’s discussion is the significant progress the distribution sector has made in reducing system loss. In 2003, about two years after EPIRA was enacted, the national average system loss was nearly 13 percent. By 2025, it had fallen to about eight percent, owing to sustained investments in modernizing networks, improving operational efficiency and efforts against electricity theft. While there is always room for further improvement, this steady decline over the past two decades shows that if the concern is rising electricity prices, system loss is clearly not the driver.

The President’s call during his SONA sparked an important conversation about fairness in electricity pricing. It brings forward the idea that consumers deserve both reliable service and continued efforts to reduce costs arising from inefficiencies that can be addressed through better management, investments and regulation. There are now several measures in Congress that seek this outcome.

According to statements and reports, electric cooperatives and related industry groups generally support efforts to reduce avoidable losses and protect consumers from paying for theft and inefficiency. However, technical losses remain unavoidable operating realities. In many rural areas, electricity must travel long distances through difficult terrain, across islands, mountains and remote communities. The longer the line, the greater the technical loss.

Stakeholders have likewise stated that as reforms move forward, a clear and sustainable approach to managing unavoidable costs is important, particularly for electric cooperatives serving far-flung communities. After all, lowering costs and maintaining reliable service should go hand in hand.

The discussions reflect the many realities that policymakers must weigh as reforms move forward. Everyone agrees on the need to ease the burden on consumers. The challenge lies in designing solutions that are both fair and sustainable.

While system loss receives significant attention, it is not the only component of our electricity bill that deserves a closer look.

For example, Filipinos pay 12 percent value-added tax on several components of the electric bill. For many households, this can amount to thousands of pesos each year. Consumers also shoulder various policy-driven charges and subsidies embedded in the bill. Even some industry organizations have argued that if the goal is meaningful electricity relief, policymakers should undertake a comprehensive review of all bill components.

What is encouraging is that more people are now taking a closer look at how electricity is priced and delivered. That conversation can only be good for consumers. I write this not only as an employee of a distribution utility, but as a senior Filipino who has lived through the blackouts, the reforms and the many debates that have shaped our power sector over the years. My only aim is to help bring a little more context to the conversation so that we have a better chance of creating reforms that will genuinely benefit Filipino consumers.