President Ferdinand Marcos Jr. may have made an ill-advised pronouncement when, in last Monday’s State of the Nation Address, he declared that system loss charges would be removed from consumers’ monthly electricity bills.

The proposal drew a standing ovation from the members of Congress. Yet the statement was not in the advance copy of the speech distributed to the media shortly before the President took the podium, suggesting that it may have been inserted at the last minute.

The pledge has also raised difficult policy questions. System loss charges cover the cost of electricity lost through technical inefficiencies in the transmission and distribution network, as well as non-technical losses such as pilferage and illegal connections. Eliminating the charge from consumers’ bills does not eliminate those costs.

Unless accompanied by a clear funding mechanism or structural reforms, proposals to abolish system loss charges would merely transfer a multibillion-peso burden from the consumers to the power distributors, generation companies and ultimately the national government.

“The issue, therefore, is not simply whether the charge can be removed, but who will ultimately bear the cost,” Manila Electric Co. (Meralco) chairperson Manuel V. Pangilinan warned on Wednesday.

As the government explores reforms to lower electricity bills, Pangilinan said the system loss is an unavoidable consequence of transmitting and distributing electricity, making it impossible to erase through regulatory changes alone.

It was not wise of the President to suggest that the system loss charge should no longer be collected by distribution utilities, according to Bienvenido Oplas, an economist, energy policy analyst and founder and president of Minimal Government Thinkers, speaking on DAILY TRIBUNE’s online program Straight Talk.

“Because if they don’t collect it from consumers, the government will have to shoulder it through the budget. That will increase our budget deficit, raise borrowing and increase interest payments. A better approach would be to keep the system loss charge and find other ways to address the issue,” he said.

Oplas then raised the question: “Was the President ill-advised then when he announced this move? From what I heard, even the secretary (of energy) was surprised, which suggests that someone else advised the President on this. Usually, the procedure is that all Cabinet secretaries are with the President when he delivers a speech.”

Pangilinan said “it’s a big bill for the industry because it cuts across generation, transmission, and distribution. The bill is too big for the industry to absorb. So there’s got to be that discussion. It’s going to impact the entire power industry in this country.”

He warned that eliminating or shifting the charge would not eliminate the physical losses that occur when electricity travels through power lines. Still, he would leave someone else to foot the bill for what could amount to tens of billions of pesos.

“The system loss will still be there. It’s not going to disappear. So who’s going to pay for that? The industry? It’s going to cost tens of billions of pesos. Will you survive?” he said.

Asked whether the system loss could instead be fully embedded in the generation rates, Pangilinan acknowledged it is one possible approach but it would merely transfer the same cost from one segment of the industry to another.

“That’s one solution, but then it’s all of the transmission loss end to end from the plant gate to our distribution,” he said.

Separately, the Department of Energy (DoE) said it was studying reforms to the system loss charge in response to the mounting public concern over high electricity bills.

Rather than simply reallocating the charges, Energy Undersecretary Rowena Cristina Guevara said the government’s priority is to reduce the actual system losses by upgrading aging distribution networks, particularly those operated by electric cooperatives.

“We need to talk to the National Electrification Administration because they need to provide loans, long term loans, so that the electric cooperatives can make improvements to the system,” Guevara said.

She said the NEA’s soft loan program could be expanded with financing from private banks and multilateral development institutions, noting that distribution assets have useful lives of 20 to 40 years, making them suitable for long term financing.

Asked if the NEA would guarantee such loans, Guevara said, “In a way, yes, because the NEA is the administrator of our electric coops. They will set guidelines for how to do this reduction of the system costs.”

She said that lowering both technical losses from aging infrastructure and non-technical losses, such as electricity theft, remains the most effective way to reduce electricity prices.

“At the end of the day, when technical system loss is improved and if we can remove or minimize non-technical system loss, only one thing is expected to happen, and that is the lowering of power rates. And that is the bottom line,” Guevara said.

Meanwhile, Energy Secretary Sharon S. Garin said the DoE is preparing measures that could be implemented immediately while broader amendments to the Electric Power Industry Reform Act (EPIRA) are being pursued.

“So, we have some things that the DoE can immediately accomplish while we’re waiting for reforms in the law, on the policies and the regulation. We can implement these as soon as we can to adjust the charges. We first need to assess the non-technical systems loss, which includes electricity pilferage,” Garin said.

She added that while changes to the law are beyond the DoE’s authority, the agency will continue pushing for reforms that would improve the system loss framework.

“It’s not within our control, but we will help them as much as we can in having better reforms for the EPIRA, including the system loss charges,” Garin said.

Hard to fulfill

Oplas said removing the system losses would be improbable.

A component of the loss is mainly technical. “This is where physics comes in — the movement of electricity through wires and cables encounters resistance, resulting in the dissipation of thermal energy,” he explained, adding that the electricity that disappears in this manner constitute about 70 percent of the system loss.

“For example, electricity coming from a coal plant like the Sual power plant in Pangasinan, which has 1,200 megawatts. By the time it reaches homes and offices through thousands of smaller cables and lines, losses occur,” he said.

“That 1,200 megawatts (MW) may decline to only about 1,100 MW by the time it reaches consumers,” he added.

“There’s nothing that can be done about it. While there are some non-technical losses like pilferage and illegal connections, the bulk is really about physics and natural system losses. So (the proposal to remove the system loss) is wrong,” he said.

“If we remove the system loss charge — which is about 27 centavos per kilowatt-hour — and bring it down to zero, that 27 centavos has to come from somewhere else. It will very likely come from taxes. That is not good,” Oplas held.

Congress vows swift action

Leaders of the House of Representatives affirmed their commitment to follow through with the President’s order.

Echoing the need for such amendments to the way power costs are charged, Speaker Faustino Dy said these reforms are needed by the public, particularly at a time when the costs of various products and services are rising due to global tensions.

Dy said it was the primary role of the Lower House to craft laws that follow the proposals and suggestions made by the President.

“Our responsibility is to enact laws that would provide relief to the lives of the people. Congress is prepared to act and propose such reforms,” he said.

The particular law that Marcos seeks to change is contained in the EPIRA of 2001 and the National Internal Revenue Code (NIRC) of 1997.

Under EPIRA, electric companies are allowed to charge consumers for any technical and non-technical losses they incur due to issues such as electricity theft and other problems with the grid.

Energy panel ready

With the matter on electricity falling under the House Committee on Energy, the panel’s chairperson, Rep. Jose Alvarez, affirmed his commitment to fast-tracking the measure to ensure it is deliberated through the appropriate proceedings.

Alvarez agreed with Marcos’s order to ensure that electricity would not only be affordable but also be “reliable” and come from a “sustainable” source.

Malacañang clarified that President Marcos’s intention is to protect consumers from having to pay avoidable costs and not to burden electric utilities with the proposal’s financial burden.

Palace Press Officer Claire Castro issued the clarification after the Philippine Rural Electric Cooperatives Association (Philreca) warned that eliminating the system loss charge without government support could result in financial losses for electric cooperatives.

Castro said the President’s proposal seeks to end the longstanding practice of passing avoidable loss charges to consumers while encouraging distribution utilities to improve their operational efficiency.

“The President wants to remove this extra cost from consumers, but not to shift the burden either to consumers or to utility companies,” she said.

Senators file bills

Senate President Sherwin Gatchalian and Senator JV Ejercito have filed complementary measures seeking to remove the system loss charge and the value-added tax (VAT) from electricity bills, translating President Marcos’s fifth SoNA directive into consumer relief.

Ejercito filed Senate Bill 2343, which would exempt the sale of electricity from VAT by amending the National Internal Revenue Code.

Unlike proposals limited to the VAT on system loss, Ejercito’s bill would remove the tax across the electricity supply chain, from generation to distribution, to lower costs for households and businesses and strengthen families’ purchasing power.

He also filed a separate measure that would prevent distribution utilities from passing operational inefficiencies, pilferage, and avoidable distribution losses to consumers.

Gatchalian, meanwhile, filed Senate Bill 2350, or the proposed System Loss Charge Abolition Act, which would prevent distribution utilities from charging customers for electricity lost before it reaches their homes and businesses.