THE Energy Regulatory Commission (ERC) is set to promulgate the removal of 12 percent value-added tax on electricity system loss charges on August 26 after incorporating consultation inputs.
‘We have scheduled a public consultation for August 25. The day after the consultation, we will finalize it and promulgate it on August 26. The effect is that the VAT will be removed from system loss charges. That is the effect,’ said ERC chairperson Francis Saturnino Juan during a Senate hearing on Thursday.
Juan said this ERC resolution will take effect 15 days after publication and following the effectivity of the BIR-RMC (Bureau of Internal Revenue – Revenue Memorandum Circular). ‘We will follow administrative due process regarding the adoption of rules,’ he said.
However, Juan said there are other ‘timing factors’ that could delay the immediate impact on consumers. He explained that there is a coordination gap with the BIR regarding when the tax removal can safely align with billing cycles. System loss recovery, he added, cannot be precalculated since it depends on actual hours consumed by customers.
‘There is a timing issue that we have already raised with the BIR….Because the actual allowable system loss cost can only be determined based on the actual hours consumed by customers, the total of which becomes the system loss recovery. And that is what is subject to the effective system loss VAT rate,’ said Juan.
As such, the effective VAT rate is not a uniform 12 percent. Also, it could vary based on where the distribution utilities (DUs) source their power generation capacity. Because of these calculation dependencies, consumers will not see an instantaneous reduction in early September.
Once all the necessary processes are completed, the system loss charge will be reflected separately on the electricity bill as a VAT-exempt item. The proposed treatment is consistent with previous BIR actions recognizing the VAT-exempt status of several government-mandated electricity charges based on ERC issuances, including the Lifeline Subsidy, Green Energy Auction Allowance, Universal Charges, Feed-in Tariff Allowance, Energy Tax, and Franchise and Real Property Taxes.
System loss is the difference between the volume of electricity injected into a power grid and the total amount measured and billed to end-users. It accounts for power that vanishes or fails to reach home meters, making up a regulated portion of monthly electricity bills.
The ERC sets the maximum caps that utilities can pass on to consumers.
The Manila Electric Company’s (Meralco) system loss rate stood at 6 percent at end-June this year, which is lower than the 6.5-percent cap set by the ERC.
Meralco chief operating officer Ronnie Aparecho said the company continues to invest in modernizing its substations, transformers, and power lines to improve efficiency. He said Meralco transitioned 100 percent to amorphous distribution transformers over old silicon steel models, citing an excellent trade-off between cost and efficiency.
He said amorphous transformers provide a 70-percent reduction in core loss and a 14-percent reduction in technical loss. The highly efficient transformers cost only three percent more than the old standard. Therefore, the substantial energy savings heavily outweigh the minor upfront price increase.
‘If the transformers you buy are more efficient, the price will increase. But the price compared to the silicon steel is only three percent increase in cost. But in terms of the technical loss reduction, its 14 percent. So, the tradeoff is very good. So those initiatives, we don’t hesitate anymore. We cannot avoid technical system losses but it can be minimized,’ said the Meralco official.