The Energy Regulatory Commission (ERC) has proposed a draft resolution to remove the 12-percent value-added tax (VAT) on system loss charges, aiming to lower electricity bills for consumers.
System Loss refers to electricity that is generated and paid for but is physically dissipated or lost in the course of transmission and distribution before it ever reaches consumers. Under existing rules, consumers are charged for this lost electricity, and on top of that, they are also made to pay VAT on the charge.
The proposal follows the directive of President Ferdinand R. Marcos Jr. in his State of the Nation Address (SONA), where he called for the reduction of electricity costs and the elimination of charges that do not reflect actual services rendered to consumers. The VAT on system loss has long been identified as a charge that consumers pay on electricity that was never actually delivered to them – a burden the President expressly sought to address.
The draft resolution, once finalized and confirmed by the Bureau of Internal Revenue (BIR), will effectively remove the VAT on the system loss charge, delivering direct and immediate relief to household and commercial electricity users nationwide.
‘System loss is electricity that consumers pay for but never receive,’ ERC Chairperson Francis Saturnino Juan said. ‘Imposing VAT on top of a charge for electricity that was never delivered to consumers is fundamentally at odds with the nature of VAT as a tax on the value of goods and services actually rendered. This proposed resolution addresses that and gives consumers the relief they rightly deserve.’
The proposed resolution amends pertinent provisions of ERC Resolution No. 20, Series of 2005, and ERC Resolution No. 14, Series of 2022, to align the existing regulatory framework with this policy position.
‘This is a concrete and immediate step as directed by the President toward making electricity more affordable. Working within our existing regulatory authority and in close coordination with the BIR, we are seeking to remove a layer of taxation that consumers have been shouldering for far too long,’ he added.
The ERC will conduct public consultations on the proposed resolution this month. ‘We invite all stakeholders to participate in the public consultation process,’ Juan said.
Should Congress amend the EPIRA law to remove the system loss charge, Juan said his office will abide. ‘We continue to coordinate with the DOE and Congress on how they want the removal of the system loss charge to happen. The policy direction from President is clear ,and we fully support it,’ the ERC chief added.
The ERC has required all distribution utilities to submit their system loss data from 2021 to 2025 and every year thereafter. In particular, the data required for submission include the generation purchased cost, transmission cost, energy output, energy input, sub-transmission and substation, feeder technical loss, non-technical loss, and kilowatt hour (kWh) shouldered by the DU in excess of the feeder loss cap, if any.
The Department of Energy (DOE), ERC, National Electrification Administration (NEA), electric cooperatives (ECs) , distribution utilities (DUs), and Congress are now working on the technical, regulatory and legislative reforms needed to address system-loss charges and their corresponding VAT.
The DOE has already created a joint task force to move this work forward across the distribution sector.
For an average household-specifically residential customer consuming 200 kilowatt-hours in July-the system-loss charge was P0.8751 per kWh. Removing the VAT corresponding to that system-loss charge alone would translate to approximately P21 in potential savings for that household.
‘It may be one component of the electricity bill, but it reflects a larger principle: consumers should not be made to shoulder costs that can and should be addressed through greater efficiency and accountability.
This is one of the first steps toward carrying out the President’s call. We are working with Congress and the Senate to move the necessary reforms forward as quickly as possible,’ said DOE secretary Sharon Garin.
‘If electricity is stolen, the cost should not simply be transferred to those who pay their bills honestly,’ she added.
DUs and ECs are not in favor of shouldering the cost related to system loss charges.
The Manila Electric Company (Meralco) had warned that completely removing system loss charges would cost tens of billions of pesos, creating a financial burden that private power firms cannot survive.
‘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 all of it. So, there’s got to be that discussion. It’s going to impact the entire power industry in this country.
‘It is not a small matter to simply [cut it] just because you can raise the bill, but the system loss is still 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. We will not survive,’ said Meralco chairman Manuel Pangilinan.
Scrapping the charge, he added, would severely disrupt the generation, transmission, and distribution sectors. Meralco’s current system loss rate sits at six percent, keeping it safely below the ERC’s 6.5 percent regulatory cap.
According to the NEA, if 25 percent of the non-technical systems loss is prohibited, 62 ECs will be affected or will suffer financial losses. If 50 percent will be removed, 71 ECs will experience financial losses. If 100 percent is removed, 89 out of the 121 ECs will surely experience financial losses.
With these figures, we have formulated some programs of the NEA-whose mandate includes the extension of loans for sustainable capex [capital expenditures] to ECs.
If the 25 percent will be implemented, we will be needing about P3.5 billion to cushion the effect to the ECs. If 50 percent of the non-technical loss will be implemented, we will be needing a loan equity fund to extend to ECs in the amount of P5.5 billion.
‘If there would be an outright implementation of 100 percent removal, NEA will be needing additional loan equity fund of P10 billion to extend loans to ECs,’ said NEA administrator Antonio Mariano Almeda.