LAST OF TWO PARTS
THE apparent highlight of President Ferdinand Marcos Jr.’s State of the Nation Address (SONA) last Monday, July 27, was his directive to Congress to eliminate the system loss charge and the value-added tax (VAT) levied on it from consumer electric bills. As I explained in part 1 of this column on Thursday (July 30), removing the VAT is relatively easy, and there are already bills in Congress that intend to do exactly that. Removing the system loss charge is rather more complicated, however, and in order for Congress to even consider doing that, two questions need to be satisfactorily answered: 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?
In the wake of the president’s pronouncement and the public excitement it caused, many concerned parties publicized their points of view. The Energy Regulatory Commission (ERC), which has the authority to set the limits on system losses that can be recovered from consumers, quite sensibly emphasized that it is following the law now as far as that goes, and if that law is changed, it will properly implement what the new law requires it to do so. The National Grid Corp. of the Philippines (NGCP) also released a sensible statement on the matter, which I will discuss in more detail below. And of course, the distribution sector, most prominently represented by Meralco chairman Manuel V. Pangilinan and the Philippine Rural Electric Cooperative Association (Philreca), also sounded off, as they would be the most adversely affected by a change in the status quo.
Regarding NGCP, it does not charge the technical losses from the transmission system to distributors or to customers, considering such losses just a part of normal operating costs, because those losses are inherent to any transmission grid. It reduces the losses through installing and maintaining equipment such as capacitor banks and static synchronous compensators, or statcoms, and absorbs the rest. NGCP is a favorite target for jingoistic legislators and policymakers looking to assign blame for the woes of the country’s energy system, but even those blowhards have had to admit it gets a pass on this issue. The system loss issue, both the reality of its existence and the direct cost to consumers, lies entirely within the distribution sector.
Although he seems to have let his strong feelings on the matter get the better of him and make him the target of much derision from the public, MVP’s vehement rejection of the idea of dropping the system loss charge, “which will cost the distribution sector tens of billions of pesos,” is actually grounded in practical reality. While a company like Meralco, which has a well-developed distribution system that gives it one of the lowest system loss rates in the country, and is otherwise very profitably managed, would not face an existential threat from the removal of the system loss charge, the same could not be said of many — perhaps as many as half or more — of the country’s 121 electric cooperatives.
Meralco and its shareholders would obviously not be happy about the revenue hit the company would take if the system loss charge were removed, but it could absorb that. But for electric cooperatives, which tend to have higher system losses due to having fewer technical resources and in many cases having distribution networks spread out over large areas of challenging rural terrain, the system loss charge they are allowed to pass on to their customers is a critical part of their revenue streams. Without it, many of them would quickly fall into tough financial straits, and either be unable to keep up with their bills to generating companies and for transmission services, or require substantial subsidy support to stay in operation and keep their customers’ lights on.
I think (and if he knows what’s good for him, he should probably agree with me) Mr. Pangilinan’s strident concern was less for his own company and more for the overall health of the energy system. If cooperatives start to fail due to having a significant part of their revenues taken away, it will be up to Meralco and other private distribution utilities to take up the slack and provide services to the cooperative customers who suddenly find themselves in the dark. The system as it is now is not capable of accommodating that, partly due to physical, technical reasons, and partly due to the legal and regulatory framework.
Solutions
Given that no electricity consumer, whether a household, a commercial business, or an industrial customer, willingly accepts paying for electricity not delivered, the ultimate objective is to indeed make the system loss charge on end-user bills go away, even if system loss itself can never be eliminated. The clue is in the way NGCP handles transmission system loss, i.e., treating it for what it is, a normal cost of operations, and accounting for it in its wheeling rates to distributors. The solutions to the problem that honor the president’s directive, provide consumers with some reduction in energy costs, and ensure that the distribution sector remains financially viable and can continue to provide services can be expressed as a few relatively simple steps.
First, drop the VAT on system loss charges. As I have already discussed, there is no logical reason why this cannot be done, and the only loss that will be incurred by doing so will fall on the government.
Second, direct the ERC to calculate an allowable system loss cost component for all distributors, dropping the distinction between private distribution utilities and electric cooperatives; the standard should be universal. Any cooperatives that have a problem with this should be reminded that the entire sector is already 15 years beyond the legally mandated deadline for them to convert themselves into stock corporations or stock cooperatives, and that is a demonstration of extreme forbearance that their anachronistic business model is tolerated at all. The threshold should be lower than it is now, and should be progressively reduced over a number of years until it reaches a percent that represents the “unavoidable” level of system losses.
Third, go ahead and abolish the authority of distributors to recover system losses from customers. That will look good. However, the ERC should then be directed to allow distributors to include system loss costs — up to the threshold it sets above — in the rate calculations, which are subject to ERC approval. They are, after all, fairly part of operating costs; it is simply the ERC’s responsibility to ensure that those costs are being incurred as efficiently as possible so that customers are charged the best possible distribution rates.
What specific legislative action needs to be done to make this happen, I don’t know; I’m not a politician, and thank fortune for that. But the plan will work; it reduces costs for consumers to the extent it is possible to do so, without requiring new government subsidies, or putting distributors who run their businesses reasonably well at risk unfairly.
ben.kritz@manilatimes.net
Bluesky: @benkritz.bsky.social
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