System loss

My boss and compadre, Manny V. Pangilinan, has railed against the plan of the Marcos Jr. administration to totally do away with system loss charges in a bid to lower the cost of electricity delivered to consumers – homes, offices and industries.

MVP warns that electricity companies will not survive if they are made to absorb system losses instead of being allowed to pass them on as regular business costs to consumers.

Indeed, MVP’s Meralco, the biggest electricity retailer, will incur losses the moment system loss charges in bills are disallowed by government.

The need to reduce electricity cost has become more urgent after the Philippines achieved an upper-middle income country (UMIC) status this year with a per capita income of $4,850.

“Electricity will be central to the Philippines’ next phase of growth,” says the World Bank in a recent paper.

“As the economy becomes more urban, digital and industrial, reliable and affordable power will increasingly shape productivity, investment, jobs and household welfare. Rising demand from households, firms, transport and data centers creates both a challenge and an opportunity,” the lender points out.

Says the bank: “If the power system expands efficiently and sustainably, electricity can become a driver of competitiveness and resilience rather than a constraint.”

“High electricity costs reflect more than just underlying fuel and capital costs. They also stem from structural features of the power system, including long-term procurement arrangements, generation concentration, grid constraints and limited market depth. Regional peers also offer broad consumer subsidies to help lower prices, but these come at high fiscal costs and are regressive,” notes the World Bank.

System loss is the electricity lost as it is delivered from the source to the end user. It ranges from five percent (in the case of Meralco) to as high as 20 percent in the case of electric cooperatives, many of which have decrepit equipment and are in hand-to-mouth profitability mode.

There are two causes: one, technical, due to factors like such distance, wiring and inadequate equipment, and two, theft.

Electricity being a business, system loss is passed on by the electricity producer and retailer to the consumer of course.  The government thinks it’s okay. It makes money on the system loss by adding value added tax, usually 12 percent of the system loss amount charged by the electricity utility.

The best solution is a burden sharing – divide system loss by three – among the electricity utilities, the government and the consumer. This will immediately reduce system loss charges by at least 66 percent, probably more if the VAT is also removed.

Meanwhile, the Federation of Philippine Industries (FPI) supports the President’s call to reduce electricity costs for Filipino consumers and businesses through meaningful reforms in the electric power sector.

“Affordable, reliable and competitively priced electricity is indispensable to strengthening Philippine manufacturing, attracting investments, expanding exports, creating quality employment and enhancing the country’s overall economic competitiveness,” says the country’s largest industrial association.  FPI is headed by Elizabeth H. Lee.

FPI supports a comprehensive review of the recovery of system loss charges, including its VAT. Any amendment to the Electric Power Industry Reform Act (EPIRA), however, should be supported by a comprehensive technical, regulatory and economic assessment by the Department of Energy (DOE) and the Energy Regulatory Commission (ERC) to ensure that any policy reform is transparent, equitable and sustainable.

FPI points out that system losses, both technical losses inherent in the transmission and distribution of electricity and non-technical losses arising from electricity theft, illegal connections, meter tampering and other unauthorized consumption, are recognized realities of electric power systems worldwide.

FPI likewise recognizes that consumers should not bear the cost of operational inefficiencies. The current regulatory framework already incorporates accountability measures through ERC-prescribed caps on recoverable losses, with losses beyond allowable thresholds being absorbed by distribution utilities and electric cooperatives.

This provides a continuing incentive for utilities to improve operational efficiency and reduce avoidable losses. Going forward, reforms should continue to encourage investments that reduce technical losses while simultaneously strengthening measures to eliminate non-technical losses through more effective anti-electricity theft enforcement and improved governance.

Also, says FPI, any reform should preserve the long-term financial viability and stability of the electric power sector.

Reliable electricity infrastructure requires sustained investments in the maintenance, modernization, expansion and resilience of the country’s transmission and distribution networks. Policy reforms should therefore be implemented through a carefully designed transition framework that provides meaningful relief to consumers without discouraging continued investments that are essential to ensuring energy security, business continuity and economic growth.

FPI encourages the government to intensify efforts to address the root causes of non-technical system losses, particularly electricity theft, illegal connections and meter tampering.

Stronger enforcement of existing laws, together with more effective anti-pilferage measures and public-private cooperation, will help reduce avoidable losses, promote fairness among consumers and improve the overall efficiency of the power sector.

FPI encourages policymakers to adopt a comprehensive approach to electricity affordability. While the review of system loss charges is an important step, other significant cost drivers – including generation costs, taxes, transmission charges, universal charges and other policy-driven components of electricity bills – should likewise be examined to ensure that reforms collectively improve the competitiveness of Philippine industry while maintaining a secure, reliable and financially sustainable power sector.

FPI stands ready to work with Congress, the DOE, the ERC and all stakeholders in developing balanced, evidence-based and forward-looking reforms that will strengthen the country’s energy sector, enhance Philippine industrial competitiveness and promote sustainable and inclusive economic growth.

Says Beth Lee: “Affordable and reliable electricity is indispensable to Philippine manufacturing and economic competitiveness. We need to strike a deliberate balance – providing relief while at the same time preserving the sector’s financial viability to ensure long-term energy security, modern infrastructure and sustainable industrial growth.”

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