The most applauded line in last Monday’s SONA dealt with the removal of systems loss and the VAT on it. It was also the most badly conceived item in the President’s speech.
The applause was either a measure of consumer desperation over the high cost of power or a measure of the incompetence of our legislators. What was being offered was a non-solution to high power costs. What was being proposed opens the door to bankrupting our power distributors – particularly the electric cooperatives whose owners are also the users.
The audience was completely hoodwinked by populist demagoguery.
It is facile to claim that consumers have nothing to do with systems loss incurred from the distribution of electricity. The contrary is true. Consumers have everything to do with systems loss – unless the laws of physics are abolished by fiat.
Systems loss is inherent in power distribution. When electricity moves through the grid and then through the distribution lines, some power is lost.
If you buy a small block of ice for relief during a hot day from a store blocks away, the amount of ice you actually bring home is less than what you bought. Some of the ice melted while being transported. That is unavoidable.
Electricity, which cannot be stored, travels hundreds of kilometers from the generating plant, through the grid, the transformers and then along the distribution lines. Some amount is necessarily lost as it travels through the system. That is inherently part of the cost of the power the consumer buys.
Otherwise, all of us will be demanding a refund from our favorite corner store for the ice we lost on the way back.
Additional loss is incurred because of pilferage or faulty equipment. This form of loss could be limited by proper maintenance and unremitting vigilance. But there are limits to what may be done regarding this form of loss. At some point, optimality is reached. The cost of enforcement will vastly outstrip the cost of recovered power.
The Philippine Rural Electric Cooperatives Association (Philreca) immediately reacted to the President’s speech. The group, representing the country’s 121 electric cooperatives, says they will support the President’s call – only if government outrightly subsidizes the cost of systems loss.
Some of our electric cooperatives incur nearly 20 percent systems loss on the power they distribute. If the President’s desire is literally applied, our electric cooperatives will go under, producing a power nightmare no one imagined until last Monday’s speech.
That is the peril of blurting out applause lines without the benefit of proper understanding.
Systems loss is not a recent invention. It has always been there. The Electricity Power Industry Reform Act (EPIRA) unbundled the costs charged to the consumer, making systems loss costs more transparent. And better regulated.
Under EPIRA, the ERC sets limits on how much may be charged to systems losses. These limits force power distributors to act against pilferages and upgrade their equipment. Private distribution companies such as Meralco are actually forced to work with lower systems loss limits than the electric cooperatives.
Under the present law, high levels of systems loss are not tolerated. Regulators are prompted to proactively force distributors to bring down systems loss levels. There are reasonable limits, of course, to how low systems losses may be brought down. Science must be respected.
All countries, including those that have the most competitive electricity markets, recognize that technical losses are unavoidable costs in the delivery of power. Most often, these unavoidable costs are built into network tariffs and distribution charges rather than appearing as a separate item in the bill consumers get. On this aspect, EPIRAa is a truly progressive piece of legislation. It enables distribution efficiency itself as an item for regulation.
If our politicians want to “reform” EPIRA, submitting to the President’s wishes, their only option is to bundle up the costs of power again. But this will cause a return to a regime of hidden costs and unreported inefficiency. Consumers will no longer see “systems loss” on their bills. Which does not mean these have miraculously disappeared. They will only be hidden as before.
Will the President’s railing against “systems loss” actually bring down power costs? No, it will not. Systems losses will simply be folded back into operating costs.
We are nearly totally dependent on imported fuel. We have a backward logistics system that makes inter-island transport and transmission high. Very little has been done to improve the country’s logistics backbone – thanks in part to unbridled corruption. The country is being pushed deeper into debt. As a result, the peso is depreciating.
There are many reasons why electric power here is higher than it is in Singapore. We cannot cure the problem by vilifying power businesses. We cannot cure all the many systemic problems by imagining that “solving” systems losses will make power affordable.
All the sound and fury about systems losses is simply populist gaslighting by our the very ones who have failed badly at the historic task of dragging our economy to modernity.
This week, Sen. Erwin Tulfo used a public hearing to extend the gaslighting. He told the distribution utilities that if they fear losses, they should get out of the business. No one educated this man about return on equity.
By the power of his uninformed mouth alone, this man can throw the whole country into a crippling power crisis.