ON Thursday, Energy Regulatory Commission (ERC) Chairman and Chief Executive Officer Francis Saturnino “Nino” Juan was grilled by Sen. Erwin Tulfo, leading a hearing of the Senate Committee on Energy, as to why the system loss charge on consumer electric bills could not be totally eliminated, as called for by President Ferdinand Marcos Jr. in his State of the Nation Address late last month. The outcome of that conversation was a perfect example of what happens when understandable yet superficial populist sentiment runs headlong into technical and economic reality.
System loss is the difference between the amount of electricity distribution utilities (DUs) or electric cooperatives (ECs) purchased from generation sources, and the amount that they actually distribute to billable customers. Under current law, DUs and ECs are permitted to recover these losses from their customers, up to a certain percentage of the generation charge, with that limit being set by the ERC. On top of that, the system loss charge is also subject to value-added tax (VAT), although it is not charged at the full 12-percent VAT rate; for Meralco customers, it is 10.08 percent. Meralco has relatively low system loss charges, ranging from 4 to 6 percent; a few ECs have even lower system loss charges, but most are higher than that, with customers of some ECs paying as much as 15 percent, the maximum allowable. Any actual system loss over the ERC-determined limits must be borne by the distributor.
Although system loss appears as a single charge on customers’ bills, there are two different kinds of system loss. Technical losses are those that occur naturally as electricity flows through wires, transformers and switchgear. These losses can be mitigated but not eliminated entirely, since neither the ERC, Congress, nor the president have the power to alter the laws of physics. Nontechnical losses are ideally controllable, as they come from electricity theft (jumpers), meter-reading or billing errors and electricity for the distributor’s own use.
In news stories about ERC chief Juan’s appearance before the Senate committee, the headline — and this includes our own report — focused on the most attention-grabbing statement that emerged, which was Juan’s assertion that some electric cooperatives would be driven into bad financial straits if the system loss charge was entirely removed. There was much more to his testimony, of course, but that single point illustrates where reality sets in. The president’s call, and the majority sentiment of the electricity-consuming public, were based on the reasonable-sounding principle that consumers should not pay for something they did not actually receive. That was also the tenor of Senator Tulfo’s questioning, although to his credit, he did seem to be seeking information to fill in gaps in his own knowledge, ending the hearing with a call for a more comprehensive review of the system-loss policy.
The ERC has been quite busy over the past couple of weeks, reaching out to DUs, ECs and other energy stakeholders to determine to what extent it can or should try to honor the president’s directive. The overwhelming conclusion of energy industry stakeholders and analysts and economic experts is that removing system loss entirely from customer bills is irrational. Ideally, it could be reduced to reflect only technical losses — lowering the charge from about 5 to 15 percent to perhaps 1.5 to 3 percent — but it is unavoidable, and a normal cost component of energy supplied to consumers.
As for the risk to ECs if the system loss charge is taken away, the expert consensus is that it is undesirable for ECs to have to count on system loss charges for operating revenues, but the current reality is that many of them do, and taking away the system loss charge all at once could be disastrous; the “consumer-friendly” initiative could very well result in consumers losing electricity service. It is not the way things should be, but it is the way things are, and so steps that are taken have to be thoughtful and measured.
To that end, the ERC has issued a draft order that should help, provided it is approved by the Bureau of Internal Revenue, something that would happen sometime after Aug. 25. The ERC’s resolution would declare the system loss charge as a government-mandated pass-through cost that should not form part of the gross receipts of generation companies, National Grid Corp. of the Philippines, and electricity distributors for the purposes of levying the VAT under the National Internal Revenue Code (NIRC) of 1997. In effect, it would immediately remove the VAT on system loss charges, and do so without requiring amendment of the NIRC, providing a modest bit of relief to consumers while the rest of the complicated system loss issue is addressed.
