Philippines to Phase In Zero System Loss Target for Power Co-ops

THE Department of Energy (DoE) said it hopes to bring system losses to zero eventually, with the pace calibrated to avoid undue stress on power cooperatives. “The removal of the (value-added tax on system losses) was done already by BIR, and now we’re working on the gradual reduction up to zero of system losses. This will take time because we have to do it gradually so that the electric cooperatives will not be caught off guard,” Energy Secretary Sharon S. Garin said at a briefing on Tuesday. System loss is the difference between the electric energy delivered to the distribution system and the energy delivered to end-users. Nontechnical system losses are the result of electricity theft and illegal connections, while technical system losses are unavoidable and occur because of inherent inefficiencies in delivering power. VAT on system losses was authorized by the National Internal Revenue Code of 1997, which was amended in 2005 through the Reformed Value-Added Tax Law. A 12% VAT is charged on the sale of electricity by generation, transmission, and distribution companies. The BIR recently issued a circular classifying the system loss charge as a government-mandated pass-through cost that does not for VAT purposes form part of the gross sales of generation companies, the National Grid Corp. of the Philippines and distribution utilities. The Energy Regulatory Commission (ERC) determined that the system loss charge imposed on electricity consumers represents the recovery of costs associated with allowable levels of power losses, rather than revenue earned from electricity sales or the provision of services. In a statement on Monday, the ERC welcomed the BIR’s issuance of the circular to formally recognize the charge as excluded from VAT. “By removing VAT on the allowable system loss component of electricity charges, consumers may see a corresponding reduction in the amount passed on to them in covered billings and transactions,” the regulator said. Ms. Garin said the removal of VAT on system loss charges could translate to a savings of at least P20 on the electricity bill of the average household. “The next step is to reduce and eventually eliminate the system loss itself,” she said. The DoE allocated P7.5 billion to curb nontechnical system losses while developing a plan to address technical losses. It allocated P4 billion for the first phase to cut nontechnical losses by 25%. Another P1 billion each will be allocated to the next two phases, which target reductions of 50% and 75%, while P1.5 billion is earmarked for the final phase to eliminate nontechnical losses. At the same time, the DoE aims to draft a distribution development plan in coordination with the ERC, National Electrification Administration, and electric cooperatives to increase efficiency and economically decrease technical losses. — Sheldeen Joy Talavera