The Philippine Independent Power Producers Association Inc. (PIPPA) said the proposals on VAT exemptions on electricity sales must be implemented in a way that is ‘revenue-neutral, executable, and seamless’ for power producers and their existing contracts.
Lawmakers have filed multiple legislative measures to eliminate or reduce the 12-percent VAT on electricity. These bills seek to provide immediate economic relief to Filipino households and businesses facing some of the highest power costs in the region.
PIPA, which has 28 member companies, said that while it supports measures that reduce electricity costs for consumers, these should be carried out in a way that is ‘tax-neutral, administratively workable, and non-disruptive’ to generation companies and existing power supply arrangements.
It strongly urged lawmakers to preserve existing power supply contracts and cost recovery mechanisms approved by the Energy Regulatory Commission (ERC). ‘VAT changes should not reopen generation rates or impair PSAs [power supply agreements], WESM [Wholesale Electricity Spot Market] settlement arrangements, or supply contracts.’
PIPPA said input VAT recovery must be protected as these measures may threaten to increase embedded costs and create ‘stranded tax costs,’ which could affect capital-intensive projects and plants with high fuel, maintenance, and capital expenditures (capex).
‘Making generation sales VAT-exempt, may prevent generators from crediting input VAT. This may increase embedded costs and create stranded tax costs, especially for capital-intensive generation projects and plants with major fuel, operation and management, or capex inputs.’
Should the bills on partial or full VAT exemption be passed into law, PIPPA said it should include a mechanism allowing generators to recover, credit, refund, or otherwise neutralize input VAT attributable to electricity supply.
PIPPA also raised concern about amending the Electric Power Industry Reform Act to mandate that the cost of subsidies, such as lifeline rate subsidy program, be funded equally by the national government and distribution utilities (DUs), prohibiting these costs from being passed on to consumers.
‘Mandating DUs to absorb 50 percent of the subsidy costs out of their own pockets could strain their financial liquidity. If DUs face financial shortfalls, they may default on or delay their payments to generation companies,’ it said. ‘Greater government appropriations for lifeline subsidies is a positive step towards more sustainable funding mechanisms.’
It recommended the conduct of a comprehensive financial impact study prior to implementation to assess long-term implications for DUs to ensure they remain capable of meeting their PSAs with generation firms.
Under the lifeline rate subsidy program, qualified 4Ps beneficiaries and low-income consumers using 50 kilowatt hour (kWh) and less of electricity per month will receive a 100-percent discount. To fund this, the ERC implemented a universal subsidy rate of P0.01 per kWh charged to non-subsidizing consumers. ‘PIPPA supports any measure aimed at reducing electricity costs for consumers. We hope however, that these are tax-neutral, administratively feasible, and non-disruptive to the energy sector. Proposed laws should protect the delicate balance of consumers and investors, allowing an efficient mechanism for recovery, credit, or refund.
On the proposed reforms to electricity subsidy, transferring the funding of social subsidies from electricity bills to the national budget would more accurately reflect the true cost of power generation and would reduce the direct rates borne by consumers. There should be a comprehensive financial impact study to assess the implications of the proposed reform,’ said PIPPA President Anne Estorco Montelibano.