First of two parts
OH boy! The president has done it now.
That was the thought that occurred to me instantly upon hearing that President Ferdinand Marcos Jr. had decreed that the system loss charge that appears on everyone’s electric bill, along with its corresponding value-added tax (VAT) levy, should be removed forthwith, in the spirit of giving consumers a little bit of relief from the region’s highest electricity rates. At the time, I was just arriving at the venue for a dinner meetup with a few other energy sector VIPs, so obviously, this was a topic of lively conversation for the rest of the evening.
Although the president’s pronouncement in the State of the Nation Address came as somewhat of a surprise, this debate that has been going on — I was about to say “raging,” but everyone involved is very polite and dignified, so that would be a mischaracterization — in one of my online communities for several days, ever since the publication of The Manila Times’ editorial (June 25) endorsing proposals in Congress to reduce consumer electric bills through the removal of various tax and subsidy charges. The general sentiment is that while everyone would obviously like their electricity bills to be lower, removing some of the charges that we now pay is easier said than done, and there are a few — the taxes in particular, as well as the system loss charge — that should not be removed.
Removing the VAT
I largely disagree with that point of view, except for the “easier said than done” part with respect to the “demand” — the word the president used — to remove the system loss charge. There were two parts to the president’s call, removal of the system loss charge and removal of the VAT on system loss, which is charged at 10.08 percent. Removing the VAT is the easy part; it may require a minor revision of the tax code, but since imposing it was an arbitrary choice by the government, it can essentially be eliminated with the stroke of a pen without serious practical consequences. The government would forego roughly P750 million in annual tax revenue, which is about 0.018 percent of its annual collections.
There are bills pending in both the House and the Senate to abolish the VAT on system loss charges, as last week’s editorial explained. The most expedient thing for Congress to do at this point would be to pass one of those in the next few days or weeks. The resulting savings to consumers would be almost inconsequential, about P25 per month for an average customer, but it would be a nice gesture, and at least partly accommodate the president’s “demand.”
System loss explained
As for the system loss charge itself, that is more complicated, because unlike taxes, system loss is a real-world phenomenon. System loss is defined as the difference in the amount of electricity a distributor purchases from generators, and what it sells to customers, and it has two components, technical losses and nontechnical losses. The technical losses are consequences of the laws of physics that neither the president nor Congress can change, and are inherent to the energy system. As electrical current passes through wires, switches and transformers, it loses strength due to resistance, and leaks away as heat. Systems and equipment can be made as efficient as possible and use the most highly conductive materials to reduce these losses, but they cannot be eliminated entirely. Nontechnical losses are things that can be controlled, and these include electricity theft through meter tampering or illegal connections, unbilled supplies such as electricity for the distributor’s own use for its facilities, or billing errors.
Under the current legal and regulatory framework, distribution utilities and electric cooperatives are permitted to recover system losses, up to a percentage of metered electricity sales set by the Energy Regulatory Commission (ERC). For distribution utilities, the cap is 8.5 percent, and for cooperatives it ranges from 10 to 14 percent, depending on the degree to which the cooperative is an operational basket case. Any system loss over the cap must be borne by the distributor, and cannot be passed on to customers. Meralco, which is catching hell from the public at the moment due to its realistic but perhaps not user-friendly reaction to the system loss abolition proposal, typically has a system loss rate well under the threshold at about 5 percent. According to data from the National Electrification Administration, about 82 percent of the country’s 121 electric cooperatives maintain system losses under their caps, with a fair number in the single digits and a few matching or even exceeding Meralco’s performance in this regard. On the other hand, there are some that are absolutely terrible, with system losses exceeding 20 percent.
The authority of distributors to collect the system loss charge from their customers does not actually come from Republic Act (RA) 9136, the Electric Power Industry Reform Act (Epira) of 2001, but rather the older RA 7832, or the Anti-electricity and Electric Transmission Lines/Materials Pilferage Act of 1994. Section 43(f) of the Epira law simply amended RA 7832 to give the then-new ERC authority to set the system loss limits.
With all of that background, the questions that need to be resolved become clear. As system loss will still exist whether or not its costs are passed on to customers, who should pay for it? And, what changes to the law and regulatory framework need to be made if the burden of system loss costs is actually taken away from consumers? I have some ideas, and I’ll discuss those in part 2 on Sunday.
ben.kritz@manilatimes.net
Bluesky: @benkritz.bsky.social
Website: www.badmannersgunclub.com
