Philippines Power Bill Surge: System Loss Charges Mask Deeper Issues

This big controversy over the system loss that power distribution utility companies are allowed to pass on to their customers reminds me of the many discussions we had on the issue during the old days at the Ministry of Energy. At the time, Meralco was being managed by a team placed there by the late Benjamin “Kokoy” Romualdez (father of ex-Speaker Martin) after Marcos Sr. took control of the company from the late Eugenio Lopez Sr. During the years of state-managed control under the Marcos regime, network efficiency deteriorated severely, compounded by non-technical losses such as widespread electricity pilferage. Meralco’s system loss peaked at a high of 21.01 percent in 1986, right before EDSA 86. Before the forced 1973 “sale” of Meralco to the Marcos-controlled Meralco Foundation Inc., system loss remained at single-digit global standard. The bigger headaches were the provincial electric cooperatives. Many cooperatives suffered staggering system losses that sometimes exceeded 40 to 50 percent. That’s because the cooperatives were badly managed by local political families. System loss by itself is an accepted reality in the power industry. As electricity moves through wires and transformers, some of it is naturally lost as heat or technical losses. It is a physics-based operational cost of delivering electricity, which regulators treat as an allowable pass-through expense required to keep the utility financially viable. What must be controlled are the losses due to pilferage and inefficiencies. Regulators are supposed to prevent utilities from passing the cost of inefficiencies to the public by imposing strict percentage caps (e.g., 5.5 percent for private utilities in the Philippines). If a utility has a nine percent loss, it must pay for the remaining 3.5 percent out of its own profits. By capping the recovery limit, utilities are financially motivated to invest in better transformers and combat electricity theft to pull their actual losses below the regulatory cap, which Meralco under MVP has done. Advanced digital systems, for instance, can drastically reduce non-technical system losses (like electricity theft). “Smart” meters which Meralco is investing in are effective at reducing commercial and administrative losses. Smart grids cross-reference the exact amount of electricity sent into a local neighborhood line with real-time consumption data of the homes on that line. If there is a discrepancy, the utility instantly pinpoints the location of an illegal connection. Meralco and MORE in Iloilo City are using these facilities. What angers the public about system losses is the thought that they are being made to pay for something they have no control of; something they did not get or use; and to add insult to injury, the government is charging them a value-added tax on it. Most electricity distribution utilities abroad do not list system losses as a separate line item on consumer bills. Instead, these costs are typically bundled directly into the base delivery, distribution or energy rates approved by regulators. Ours is more transparent. But blaming system loss for the sharp increases in our electricity bills misses the real cause. Sharp rises in imported fuel account for most of the increases we are seeing. Inadequate supply is another reason since our rates are market-driven under EPIRA. There are also government-imposed charges to support rural electrification, two allowances supporting renewable energy as well as old Napocor losses which should all be shouldered by the government rather than the consumers. EPIRA is a significant factor. Somehow, it has failed in its promise to make competitive market forces bring down the cost of electricity. Instead, it produced an oligopoly of power producers whose pricing is favored by a scarcity in supply. Indeed, ERC keeps on putting caps on the electricity spot market to moderate the increases the public will feel. But that negates the idea that the spot market provides the signal to encourage investments in peaking plants to prevent blackouts. The shift in the rate-setting formula from the old Return-on-Rate Base (RORB) system to the Performance-Based Rate (PBR) system is also a reason we are paying more now. For one, PBR increased the distribution component of a typical household electricity bill. For another, ERC removed the fixed 12 percent cap and allowed the regulated rate of return to climb depending on the regulatory period. Then ERC failed to reset rates by missing several regulatory periods, creating a void in the rate-setting process for the period July 1, 2015 to June 30, 2022. That’s pure incompetence in failing to perform its major obligation, its reason for being, for seven long years. The PBR formula also allowed distribution utilities and the national transmission grid to start collecting money from consumers for future infrastructure projects that have not yet been built or validated. Why are Filipino electricity consumers being made to finance the capital expenditures (capex) of distribution utilities? This is a consequence of privatization. Utility capex is usually huge and has bankrupted Napocor. The government can’t afford to continue spending on needed capex, a reason it cited when it privatized the national grid and power generation. But these capital expenditures are vital to efficiency that benefits the consumers. Under EPIRA, grid modernization is not treated as a deduction from utility profits, but as a regulated investment charged to the consumer. Apparently, even our leaders, from BBM to senators and congressmen do not understand this system either, based on their public statements. The core public grievance is the perception of a double penalty: Consumers explicitly pay a systems loss charge on their monthly bill to cover electricity that was lost or stolen. Yet, consumers are also being made to finance the capital expenditures (capex) required to fix those exact same inefficiencies via the distribution charge. If we want to bring down our electricity rates, we should not be distracted by the rounding error that system loss really is. Review EPIRA instead. Because our electricity rates are now the highest in ASEAN, that deserves a good public discussion. Boo Chanco’s email address is [email protected]. 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