System Loss Charges: Consumers' Burden Under Policy Debate

MANILA, Philippines — Every month, households pay a system loss charge—a small line item on the power bills that many overlook but has now become the focus of a growing policy debate. In his fifth State of the Nation Address (Sona), President Ferdinand Marcos Jr. has called for amendments to the Electric Power Industry Reform Act of 2001 (Epira) to bar distribution utilities and electric cooperatives from passing system loss charges—and the corresponding value-added tax—to consumers. READ: Marcos wants electricity system loss charges scrapped At first glance, the proposal appears simple. If electricity never reaches consumers, then why should they pay for it? The answer, however, is not as simple as it seems. System loss is the gap between electricity transmitted and what is ultimately billed to customers. Technical losses occur naturally as electricity travels through power lines, transformers and other equipment. Non-technical losses arise from electricity theft, illegal connections, faulty meters and other unauthorized consumption. Current regulations allow distribution utilities and electric cooperatives to recover only a portion of these losses, subject to caps set by the Energy Regulatory Commission (ERC). For private distribution utilities and electric cooperatives, the system loss cap is set at 6.5 percent and 8.5- to 12 percent, respectively. As a rule, utilities must absorb any losses that exceed these caps. Removing the system loss charge would immediately reduce consumers’ monthly electricity bills. The proposal also reinforces the principle that customers should not shoulder costs arising from operational inefficiencies or electricity theft that they neither caused nor controlled. Malacañang supports the proposal while emphasizing the need for a balanced approach. Palace Press Officer Claire Castro said the administration wants policies that provide relief to consumers while ensuring fairness to all affected sectors. The Department of Energy (DOE) also supports reviewing the existing law but says lawmakers, regulators and industry stakeholders must carefully coordinate any changes. The agency notes that authorities can reduce non-technical losses through stronger enforcement, but they can only reduce technical losses over time by investing in modern and more efficient distribution systems. READ: DOE: Scrapping ‘system loss’ charge may take a year Removing the system loss charge does not eliminate the underlying cost. Power generators have already produced the electricity that utilities lose during transmission and distribution. The ERC has warned that if consumers no longer shoulder the recoverable portion of system losses, someone else will have to absorb the cost—whether distribution utilities, electric cooperatives, government or another mechanism that lawmakers may eventually adopt. Manila Electric Co. chairman Manuel V. Pangilinan has echoed that concern, noting that every electricity network experiences technical losses. The debate, he said, is not whether system losses exist but who should ultimately pay for them. If distribution utilities and electric cooperatives absorb costs they currently recover from consumers, they could have fewer resources to maintain and upgrade power lines, replace aging equipment and expand their distribution networks. Larger utilities may have greater financial flexibility to absorb the impact, while smaller electric cooperatives could face tighter financial constraints. The Philippine Rural Electric Cooperatives Association (Philreca) says many electric cooperatives serve geographically dispersed and mountainous communities where longer distribution lines naturally result in higher technical losses. Because these cooperatives serve fewer customers across wider territories, absorbing additional costs could prove more difficult without affecting operations or delaying future investments. READ: Palace open to talks on scrapping ‘system loss’ billing The final impact on service quality will depend on how Congress structures the reform, whether government provides alternative funding or support, and whether utilities succeed in reducing actual system losses. The issue extends beyond a single line item on the monthly electric bill. At its core, lawmakers must balance consumer protection with the financial sustainability of the country’s electricity distribution system. Eliminating the system loss charge could provide immediate relief to households, but it would not eliminate the underlying cost. The larger challenge is not simply deciding who should pay for system losses but finding ways to reduce them. Modernizing the grid, curbing electricity theft, upgrading aging infrastructure and improving operational efficiency could lower losses over time and reduce costs for both consumers and utilities. Consumers also have a role to play. They can report illegal connections, meter tampering and other forms of electricity pilferage to distribution utilities or the appropriate authorities. These actions help reduce non-technical losses that drive up costs across the system. While policymakers debate who should pay for system losses, reducing those losses in the first place may offer the most sustainable solution. Ultimately, the success of any reform will not depend solely on whether the system loss charge disappears from electric bills. It will also depend on whether the country builds a more efficient, reliable and financially sustainable power system that delivers affordable electricity without simply shifting the cost from one sector to another. INQ