Beyond system loss

President Marcos was loudly applauded during his fifth State of the Nation Address (SONA) several times, but especially when he promised to remove system loss charges from electricity bills. The crowd that gathered at the Batasang Pambansa even gave him a standing ovation.

The intention is very much welcomed in this era of bill shocks and skyrocketing prices of just about everything. He even sounded heroic when he said consumers should not be paying for power that is lost. That is true, but it is also more complicated than that.

As a consumer, I, too, would want to see electricity charges ease. In fact, I have been looking into shifting to solar power, as many of my friends, who are trying to save on power costs, have done.

But as with any populist measure, somebody will eventually end up paying for it. Take note that if one charge is removed, the cost is still there. Power generation companies, despite their hefty profits, certainly won’t absorb it, and neither will the problematic electric cooperatives (ECs), which in some cases have become bankrupt because system loss accounts for as much as 12 percent of the power bills they charge. This is higher than Meralco’s, which is roughly five percent.

The government may absorb the cost, but taxpayers will end up paying for it. As I said, there is no way the gencos, distribution utilities (DUs) and the ECs will absorb it.

What can be done?

The Energy Regulatory Commission (ERC), the power regulator, which welcomed the proposal to remove the system loss charge, can look at other components of our electricity bill to see where there is room for reduction.

The ERC, after all, said that it recognizes the importance of pursuing measures that help reduce unnecessary costs while ensuring the viability of all DUs.

Stricter regulation can also ensure that power players do not overcharge customers. In short, a reduction in the profits of power firms may actually help reduce electricity rates.

Nicky Franco, head of research at Abacus Securities, suggested compelling Meralco and perhaps other DUs to disclose the return on equity for their distribution business.

This way, he said, the ERC can determine whether rate hike petitions sought by DUs such as Meralco are justified or whether there should be meaningful reductions in their tariffs.

Another way to lower prices, he said, is to reduce the generation component of our power bills.

“The generation component of our power bills – the largest at over 50 percent of the total – can be lowered by addressing the financing side. People might not realize it, but banks are too conservative, and they are contributing to the high cost of electricity.

“At present, the standard practice is to require proponents of new power plants to secure PSAs of as long as 25 years, even though the tenor of the loans extended for construction is usually only about 10 to 12 years. What this has done is lock distribution utilities and their customers into a certain cost even when new and cheaper alternatives become available.

“The ERC or Congress, if needed, should cap PSAs to an average of no more than 12 years. This way, consumers don’t have to be locked into prices that are no longer competitive,” Franco said.

How about removing VAT on electricity? I agree with this suggestion, although given the current state of the country’s finances, the lost revenue would have to be replaced by revenues from other sources.

Franco suggests an alternative source of revenue if VAT is removed:

“One potential solution is a tiered VAT system that would impose, just as an example, a 15 percent rate on luxury goods and services. Think Swiss watches, designer handbags, golf and other club memberships, luxury cars, houses above P10 million, elective cosmetic procedures, etc. A tiered VAT would be more complex and therefore harder to administer, but it can be made manageable with extensive preparation, clear definitions, unambiguous rules and technology. It would also be very progressive.”

Hidden agenda

I was actually wondering who suggested the removal of the system loss charge to President Marcos.

Maybe whoever made the suggestion had a bigger agenda, and that is to finally push through with amendments to the Electric Power Industry Reform Act of 2001.

Removing the system loss charge will require an amendment to the EPIRA, but perhaps some stakeholders want to push for broader reforms.

Many of the country’s power stakeholders want the EPIRA amended, particularly the market share limits, which state that no company or related group may own, operate or control more than 30 percent of the installed generating capacity of a grid or 25 percent of the national installed generating capacity.

Some also want the cross-ownership provisions amended, as these impose restrictions on ownership across generation, transmission, distribution and supply, particularly to prevent the transmission concessionaire from having conflicting interests.

Bringing down the cost of power

It’s good that Marcos is well aware that Filipinos are hurting from bill shocks and has vowed to address the problem, but bringing down electricity prices requires more than eliminating one charge.

It will take a combination of stronger regulation, greater competition, new and cheaper domestic power sources and well-targeted government support.

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