System Loss: Consumers Foot Bill for Electricity Never Received in Philippines

President Ferdinand “Bongbong” Marcos Jr.’s call during his 2026 State of the Nation Address (SONA) to remove system-loss charges and the value-added tax (VAT) imposed on electricity consumers produced one of the afternoon’s loudest applause. Play Video His argument was simple: consumers should not be punished for electricity lost because of defective equipment, inefficient networks, or theft they did not commit. Behind that popular declaration, however, lies a complicated regulatory system that has protected distribution utilities from costs that most businesses would normally be expected to manage. System loss is the difference between the electricity entering a distribution network and the electricity eventually measured and billed to customers. It is calculated as: If a utility receives one billion kilowatt-hours (kWh) but bills only 940 million, the missing 60 million kWh represents a 6%-system loss. The utility nevertheless paid generators and the transmission operator for the entire one billion kWh. Under existing rules, it may recover the cost of the lost electricity from paying customers, provided the loss remains within the ceiling approved by the Energy Regulatory Commission (ERC). Some electricity inevitably disappears as heat when it passes through transformers, cables, and distribution lines. These are technical losses which cannot be eliminated completely but can be reduced through better equipment, shorter lines, and sound network design. Nontechnical losses are another matter. They include illegal connections, meter tampering, defective meters, billing errors, and unmetered consumption. These are largely management and enforcement failures. The math highlights why the real financial burden is heavier than it looks. For example, when a 6.5% allocation charge is distributed across every 100 kWh, but only 93.5% of power is actually delivered, it hikes up the effective rate to 6.95%: At a combined generation and transmission cost of P7 per kWh, that could add approximately P0.49 for every delivered kWh. A household consuming 300 kWh could consequently pay around P147 for system loss, plus P17.64 in VAT. Actual charges vary monthly with the cost of purchased power and the utility’s recorded losses, but Meralco itself estimates that system loss represents roughly 5% of a typical electricity bill. Must Read EXPLAINER: What is system loss, and how does it affect your power bill? Not EPIRA law System-loss recovery was not created by the Electric Power Industry Reform Act, officially known as Republic Act No. 9136, (EPIRA Law) which sought to restructure the country’s electric power sector. It was Republic Act No. 7832 or the Anti-Electricity and Electric Transmission Lines/Materials Pilferage Act of 1994 that criminalized electricity theft and meter tampering, authorizing immediate service disconnection, penalizes offenders with 6 to 12 years of imprisonment or hefty fines. It mandated the payment of differential billings, allowing private utilities and electric cooperatives to recover losses of up to 9.5% and 14%, respectively. The ERC later reduced the ceiling for private distribution utilities to 6.5%. Losses above the ceiling cannot be passed on, but allowable losses remain the customer’s responsibility. The EPIRA Law did not create the VAT on system loss, either. Electricity became subject to VAT under the expanded VAT law enacted in 2005. Because the system-loss charge forms part of the utility’s taxable receipts, the government imposes a 12% VAT on it. Legally, it is taxation on the cost of delivering electricity. Economically, consumers are being taxed on power they never received. EPIRA was enacted in 2001 after the power shortages of the 1990s and the accumulation of roughly P900 billion in National Power Corporation (Napocor) debt. It divided the industry into generation, transmission, distribution, and supply; ordered Napocor’s privatization; created Power Sector Assets and Liabilities Management Corporation (PSALM) and the ERC; and eventually established the wholesale electricity spot market. The reform also reflected conditions encouraged by international lenders, including a $300-million Asian Development Bank restructuring program approved in 1998. Competition, however, was introduced principally in generation and supply. Distribution remained a geographic monopoly. A household in Metro Manila does not have the option to replace the Manila Electric Company (Meralco) with an alternative power provider. Generation and transmission costs, taxes, subsidies, and allowable system losses are largely passed through, while Meralco separately earns regulated distribution, supply and metering charges. It does not pocket the entire system-loss payment, but it is substantially protected from the cost of electricity disappearing inside its network. EPIRA also permits distribution utilities to buy power from affiliated generators, subject to ownership limits and competitive-selection requirements. This creates an obvious tension when a distributor acts as electricity buyer and bidding administrator while companies connected to its corporate group compete to become suppliers. The law promised competition but tolerated substantial vertical integration. Meralco: Some system loss unavoidable, urges careful EPIRA reform Look back The Lopez family which owned large power-generating assets through First Philippine Holdings and First Gen-controlled Meralco when EPIRA was enacted. It benefited from private generation, Meralco’s protected franchise and legally permitted affiliate transactions. Yet EPIRA cannot defensibly be described simply as a Lopez-written law, and Meralco is no longer Lopez-controlled, having passed to the Manuel V. Pangilinan-led group. Interestingly, there was a genuine payola controversy in 2000 when then-party-list representatives Etta Rosales and Rene Magtubo alleged that lawmakers received P500,000 each in connection with the Omnibus Power Bill, EPIRA’s legislative predecessor. The House-led investigation of that controversy stalled, and no judicial finding was established that the Lopez group provided the funds. Therefore, while we cannot say the Lopez group is definitely guilty of bribery, the EPIRA law was still passed under a cloud of unresolved corruption allegations. In the President’s SONA, a real incentive problem was clearly identified. When losses are automatically recoverable, shareholders have less reason to eliminate them. But technical losses cannot be abolished by presidential applause. Congress must prohibit recovery of nontechnical losses, impose strict network-specific benchmarks, require independent audits, and make shareholders absorb inefficient performance. Otherwise, system loss may disappear as a visible charge only to return under another name. The Philippine Rural Electric Cooperatives Association, Inc. (Philreca) which represents electric cooperatives operating