By Ricardo G. Barcelona and Monalisa Dimalanta

(Part 1)

System losses in the Philippine power sector represent far more than a billing issue. They serve as a test of whether regulation enforces discipline on inefficient operators or permits the costs of weak governance, theft, and operational neglect to be transferred directly onto consumers. In a country where residential electricity rates rank among the highest in Southeast Asia, the stakes of that test extend well beyond accounting — they bear directly on household affordability and industrial competitiveness.

The starting principle is straightforward. Competitive markets reward efficient suppliers, expose those that are inefficient, and compel persistent underperformers into restructuring, asset stranding, or market exit. Technical losses constitute a normal cost of supply within efficient limits. Losses exceeding those limits — particularly those driven by theft, weak governance, or substandard operations — should not be socialized through consumer tariffs or subsidies.

The core policy test can be stated plainly: consumers should bear only efficient, benchmarked technical losses, while avoidable commercial losses should be absorbed by power suppliers, operators, shareholders, and lenders. This framework ties together system-loss regulation, market discipline, regulatory reform, grid investment, and cooperative restructuring under a single legislative reform logic.

How Competitive Power Markets Work

Market discipline begins with price formation and dispatch. Under the competitive-market design envisioned for the Philippines through the Electric Power Industry Reform Act (EPIRA, Republic Act No. 9136), enacted in 2001 to restructure the sector and privatize state-owned National Power Corporation (NAPOCOR) generation assets, generation prices are established by the marginal supplier in each trading period. Dispatch should follow economic merit order, meaning lower-cost, more efficient generators supply power first, while higher-cost plants operate only when demand necessitates.

The effect is direct: efficiency is rewarded and inefficiency is exposed. Lower-cost generators earn higher dispatch volumes and stronger revenue opportunities. Structurally uncompetitive suppliers, by contrast, face lower utilization, weaker margins, and eventual bankruptcy if underperformance continues.

The same discipline should govern system costs. Power supply encompasses fixed-cost recovery, variable operating costs, fuel where applicable, and the efficient technical losses required to operate the network. The policy question is whether those costs reflect efficient service or conceal avoidable underperformance.

Properly framed, the question is not whether losses exist, but whether the level permitted for recovery is efficient, transparent, and correctly allocated. Once framed in those terms, system losses cease to be a billing controversy and instead become a test of regulatory architecture.

Understanding System Losses

System losses arise because electricity delivery functions as an integrated production and logistics chain. The system must generate more energy than customers ultimately consume, because plant operations, ancillary services, network equipment, and physical delivery constraints all consume energy before power reaches the end user. When losses exceed efficient levels, the issue shifts from engineering reality to regulatory accountability.

In generation, technical losses are typically modest and stem from ancillary services and equipment operations. Transmission and distribution losses run higher because network delivery is physically more complex. Efficient urban distribution systems can operate at relatively low loss levels; weakly governed or poorly maintained systems generally cannot. In the Philippines, system loss charges appear as a discrete line item on consumer electricity bills, making the cost visible — and politically sensitive — in a way that bundled charges are not. Electric cooperatives, which serve a large share of provincial areas, have historically reported higher system loss levels than private distribution utilities such as Meralco, reflecting differences in capital resources, governance, and enforcement capacity.

The decisive distinction lies between efficient technical losses and avoidable commercial losses. Efficient technical losses are a legitimate cost of reliable supply. Commercial losses arising from theft, weak collection, or governance failure constitute operational failures and should not qualify for automatic cost recovery through power pricing.

This principle applies most directly to transmission and distribution — the wires businesses that generally operate as natural monopolies. Because customers cannot choose among competing wires providers, regulation must simulate market discipline through price formulas that reward efficiency and penalize underperformance. One such mechanism is the inflation-adjusted RPI – X approach used across many liberalized power markets.

The logic of RPI – X is simple. A reference price is established for a regulatory period, adjusted annually for inflation, and reduced by an efficiency factor capturing expected productivity gains. For example, a P10/kWh reference price, 6% inflation, and a 2% efficiency factor would yield a Year 1 price of P10.40/kWh. That predictable framework gives utilities room to plan capital expenditure while preserving the financial benefit of outperforming the efficiency target.

Under this model, system losses become a management and governance question rather than a pass-through entitlement. If a utility reduces losses below the benchmark, it retains the savings. If it performs worse, it bears the financial consequence rather than automatically transferring the cost to consumers.

This reasoning explains why a high-loss system can justify a stronger efficiency factor. In early phases of power-market liberalization, substantial efficiency gains are often available because better metering, targeted capital expenditure, theft reduction, and professional management can reduce losses faster than inflation raises costs.

Philippine practice weakens this incentive model when tariff recovery operates as cost-plus protection. If excess losses can be passed through, the supplier's commercial problem becomes the consumer's bill. If recovery is capped and benchmarked, management gains a direct financial incentive to invest, enforce, collect, and reduce losses.

Who Pays for System Losses

The allocation rule should be made explicit. Consumers should pay for efficient technical losses because those losses are unavoidable in reliable electricity delivery. Losses exceeding efficient benchmarks should fall on suppliers through reduced margins, lower profitability, restructuring, or market exit.

In a functioning market, this allocation becomes self-reinforcing. High-loss suppliers and operators face higher costs and weaker margins. Efficient operators gain market share. Inefficient assets are stranded, repowered, sold, or retired. The regulator's role is not to protect supplier or operator profitability, but to enforce transparent rules that align investment, performance, and consumer welfare.

Where losses remain persistently high, the policy response should not be automatic pass-through or open-ended public support. Recovery above efficient benchmarks should trigger a graduated sequence: tighter reporting requirements, enforceable loss-reduction plans, limits on recoverable costs, management intervention, restructuring, merger, sale, or exit.

This constitutes the core policy discipline: consumers are shielded from avoidable failure, efficient operators retain the upside of strong performance, and weak operators bear the downside of poor execution.

Why System Losses Are Mis-Perceived as Crises

This distinction clarifies why system losses are frequently misread as a crisis. The problem is not that electricity networks incur losses — efficient technical losses are unavoidable. The policy failure arises when avoidable commercial losses are treated as recoverable costs rather than as evidence of weak operations, weak enforcement, or weak governance.

A cost-plus mindset sets consumer and supplier interests on a collision course. Consumers expect reliable power at affordable prices. Suppliers seek full cost recovery even when weak operations, elevated losses, or poor governance inflate the cost base. The result is not a market signal but a regulatory subsidy for inefficiency.

This distinction carries real consequences for reform design. A blanket ban may lower a line item but merely shifts costs elsewhere if technical losses go unfunded. A benchmarked disallowance regime, by contrast, targets the actual problem by protecting consumers from avoidable losses while preserving financially viable recovery for efficient network operation.

The resulting reform choice is not deregulation versus consumer protection. It is whether consumer protection is delivered through disciplined incentives or through permanent socialization of the costs created by suppliers' failures.

The same test applies to the Wholesale Electricity Spot Market (WESM) and its institutional ecosystem. WESM, which began commercial operations in Luzon in 2006 and has since expanded to the Visayas and Mindanao, should function as a genuine wholesale market in which supply is competitively offered, efficiently dispatched, and financially disciplined. If it operates primarily as a cost-recovery mechanism, it cannot deliver the efficiency gains that market reform was designed to produce.

Operational Lessons from Theft Reduction

The experience of utilities that have successfully reduced theft in difficult service areas demonstrates that commercial losses can be addressed when incentives are properly structured. One practical approach is to align transformer capacity with contracted paying demand. If illegal connections overload the system and trigger outages, paying customers acquire a direct incentive to identify unauthorized connections within their community and integrate them into the paying base before capacity is expanded.

The relevant lesson drawn from Latin America, United Kingdom distribution reform, and Meralco's experience in Tondo is narrow but significant: theft reduction succeeds when engineering discipline, local accountability, and credible enforcement are aligned. It should not depend on tariff recovery that shifts the cost of avoidable losses onto paying customers.

The operational lesson is therefore directly relevant to policy design: losses decline when accountability is local, incentives are credible, and non-performance carries financial consequences.

(To be continued.)

Ricardo G. Barcelona, FEI, PhD, was elected as a fellow at the Energy Institute, United Kingdom, and serves as adjunct professor at the Asian Institute of Management, Philippines. He was head of energy practice at SBC Warburg and ABN Amro/Rothschild, London, United Kingdom, a top-rated analyst for European Utilities, and a member of the leading energy privatization group. He authored the books Energy Investment and Dynamic Decisions, published respectively in London, United Kingdom by Palgrave Macmillan and World Scientific Publishing Europe. Contact:

Monalisa Dimalanta is the former chairperson and CEO of the Energy Regulatory Commission (August 2022–August 2025). She is presently a columnist at Businessworld, senior partner of PJS Law, a professor at the Ateneo Law School, and advisor at the Institute for Climate and Sustainable Cities. She served as chairperson of the National Renewable Energy Board (Philippines) from 2019 to 2021. Contact: