PHILRECA backs VAT removal, sets system loss safeguards

MANILA — The Philippine Rural Electric Cooperatives Association backed the proposed removal of the 12% value-added tax on system loss charges but warned that the reform must not leave electric cooperatives and other power-sector participants with unrecovered costs.

PHILRECA said it would support the complete removal of system loss charges from electricity bills only if the national government directly pays for the costs through a dedicated subsidy mechanism.

President Ferdinand R. Marcos Jr. called for an immediate amendment of the Electric Power Industry Reform Act during his fifth State of the Nation Address on July 27, directing policymakers to reform the treatment of system losses and protect consumers from avoidable electricity costs. The Department of Energy subsequently said any changes must balance lower electricity prices with the financial stability and reliability of the power sector.

The policy debate carries implications beyond the removal of a line item from monthly bills.

A poorly designed reform could allow the cost to reappear elsewhere in the electricity supply chain or reduce the funds available to rural cooperatives for maintenance and system upgrades.

A coordinated subsidy and tax framework, however, could provide measurable relief to consumers without weakening electricity service in rural and geographically difficult areas.

PHILRECA said consumers should not be taxed for electricity that is lost before reaching their homes.

The association called for a comprehensive review and legislative revision of existing tax rules before VAT on system losses is removed.

“For the removal of VAT on system loss to be truly meaningful and fair, it must not result in unrecoverable input VAT or disguised costs that Electric Cooperatives, generation companies, the National Grid Corporation of the Philippines, or end-consumers will ultimately have to shoulder,” PHILRECA said.

Under current tax arrangements, electric cooperatives pay input VAT to generation companies and the National Grid Corporation of the Philippines for electricity delivered through the grid.

Electricity sales are generally covered by the country’s 12% VAT on services, although specific transactions, including qualified renewable-energy sales, may be zero-rated under existing laws.

PHILRECA warned that removing VAT only from the consumer-facing portion of the system loss charge could prevent electric cooperatives from recovering input VAT they had already paid.

The association said the unrecovered tax would become an additional operating expense for electric cooperatives, which are organized as nonstock, nonprofit entities.

PHILRECA proposed zero-rating or appropriate tax exemptions across the electricity value chain for power lost during generation, transmission, or distribution.

It said the approach would ensure that the tax relief benefits consumers instead of transferring costs to electric cooperatives, generation companies, transmission providers, or member-consumer-owners.

PHILRECA also set a condition for supporting the broader proposal to remove system loss charges entirely.

“We can support the complete elimination of system loss charges from electricity billing if and only if the national government directly shoulders these costs through a dedicated subsidy mechanism,” the association said.

PHILRECA said some technical losses are unavoidable in rural distribution networks because electric cooperatives operate long feeder lines across mountainous, remote, and otherwise challenging terrain.

The association said such losses can result from the physical characteristics of electricity transmission and distribution and do not automatically indicate inefficiency by an electric cooperative.

Section 25 of EPIRA requires regulated retail rates to follow the principle of full recovery of prudent and reasonable economic costs.

The law also authorizes the Energy Regulatory Commission to determine recoverable system loss caps based on load density, sales mix, cost of service, delivery voltage, and other technical considerations.

PHILRECA warned that prohibiting all system loss recovery without a government subsidy could bankrupt nonprofit electric cooperatives and violate Section 25 of EPIRA.

Should the government decline to shoulder the costs, the association urged Congress to adopt a performance-driven transition instead of immediately prohibiting all system loss recovery.

PHILRECA proposed customized, feeder-specific technical loss caps to be determined by the ERC.

The proposed framework also calls for government-backed financing for grid upgrades and stronger enforcement against electricity pilferage.

Existing ERC rules group electric cooperatives according to technical considerations and set different recoverable system loss caps for each cluster.

The framework began with a 12% cap in 2018 and provided for cluster-based caps ranging from 8.25% to 12% from 2022 onward, while recent ERC decisions have continued to apply individualized or cluster-specific limits.

PHILRECA maintained that consumer relief should address or fund the underlying costs rather than transfer them to another part of the electricity supply chain.

PENDING APPLICATIONS

The association separately urged the ERC to accelerate its review of electric cooperative capital expenditure applications.

PHILRECA said prolonged regulatory proceedings are delaying investments needed to modernize rural power distribution systems and improve service reliability.

In a statement issued after Marcos’ State of the Nation Address, the association said 107 capital expenditure applications filed by 62 electric cooperatives between 2011 and 2023 remain under ERC evaluation.

The proposed projects include new substations and advanced metering infrastructure.

PHILRECA said electric cooperatives require regulatory approval before they can use capital funds for the projects.

ERC rules require regulated entities to file applications covering different categories of capital expenditure projects, with some projects requiring approval before implementation.

“Without official approval, ECs are legally prohibited from utilizing capital funds to support modernization without facing severe penalties, which in turn, will further strain their limited cash flows,” the association said.

PHILRECA said the pending applications illustrate broader challenges confronting electric cooperatives, which it said operate under stricter regulatory oversight than privately owned distribution utilities.

The association said electric cooperatives are also facing financial pressures that restrict their ability to invest in distribution infrastructure.

PHILRECA cited a joint study with the National League of Electric Cooperatives Finance Managers of the Philippines that found electric cooperatives accumulated more than PHP 71 million in unreimbursed claims under the Uniform National Lifeline Subsidy Program from March to May 2026.

The lifeline program provides subsidized electricity rates to qualified low-income households that cannot afford to pay the full cost of electricity.

PHILRECA said rising transmission-related charges and volatile prices in the Wholesale Electricity Spot Market have added to the cooperatives’ financial burden.

The association said lower collection efficiency following the government’s no-disconnection advisory has further constrained working capital.

PHILRECA called on the ERC and the DOE to impose mandatory timelines for deciding capital expenditure applications.

It also asked the agencies to expedite the payment of validated subsidy reimbursement claims.

The association urged Congress to exempt electricity sales from the 12% VAT and condone penalties owed by financially distressed electric cooperatives.

“Energy security is vital to national stability, but it cannot be built on a foundation of scapegoating,” PHILRECA said.

“Electric cooperatives remain fully committed to modernizing their distribution networks, adopting renewable energy solutions, and expanding rural access.”

PHILRECA said achieving the country’s energy security goals would require coordinated action among regulators, generation companies, transmission operators, and distribution utilities.