Removing all system loss charges a bad idea, economist says

Removing all system loss charges from electricity bills, including the value-added tax applied to them, is a bad idea, Institute for Economic Development and Econometric Analysis (IDEA) President Alex Escucha said Monday.

“I think it’s a bad idea to simply say, remove all system loss charges, including the VAT per se. I don’t agree with that,” Escucha said in an interview on One News’ Morning Matters.

He said utilities should instead be allowed to recover only the system losses that fall within an established benchmark, with any excess absorbed by the utility itself.

“And then anything above that should be absorbed by the utility,” Escucha said.

“What does it mean? It means that there is an incentive for them to improve their efficiency. Because if they’re allowed to pass on everything, they’re not being penalized for being inefficient,” he added.

Escucha said President Ferdinand Marcos Jr. did not call for the removal of the charges but for a review of the Electric Power Industry Reform Act (EPIRA).

“And to be fair to the President, he didn’t say ‘remove.’ He just demanded the review of the EPIRA law, which is the correct statement to make,” he said.

He described the proposal to scrap the charges as “a very populist move, very attractive to the public,” but said any such move requires a clear study.

Escucha said system loss has two components, the technical and the non-technical.

The technical component covers the physical losses that occur as electricity moves toward the consumer, and the Energy Regulatory Commission (ERC) has set a limit of 3.75% for it.

The non-technical component covers losses from illegal connections, jumpers, and similar causes, with the ERC limit for cooperatives set at 4.5%, for a total cap of 8.25%.

Escucha said he compared his own Meralco bills from October last year and July this year and found a system loss of 5.69%. He said the value-added tax figure on that bill was 10.08%.

“In short, the Meralco franchise is actually relatively efficient compared to global standards already. It is the electric cooperatives outside of the Meralco franchise — and there are 121 of them — where these losses are huge,” he said.

He said some electric cooperatives are efficient enough to meet the 8.25% cap, while others report losses ranging from 16% to 39%.

“These are big. Either they are struggling or they are really badly managed. So these are the ones that should be really reviewed,” Escucha said.

Asked whether distribution utilities could survive an arrangement in which consumers no longer answer for system loss charges, Escucha said they could, provided they are properly regulated.

He said well-regulated distribution utilities elsewhere in the world follow a two-step approach that separates the unavoidable technical losses from the losses a utility can manage.

“But there are the losses beyond that you should be able to manage in the same manner, because if you’re able to manage that, any reduction in your inefficiency or loss goes directly to their bottom line,” he said.

Escucha proposed benchmarking against international practice, citing Germany, Belgium, and Sweden as the best cases, and setting the recoverable system loss at roughly 4% to 5%.

He said the electric cooperatives differ from Meralco in that they are non-corporations supervised by the National Electrification Administration (NEA).

Escucha said the cooperatives received an NEA subsidy of PHP 13.82 billion from 2022 to 2026, an average of PHP 2.76 billion per year.