When President Ferdinand Marcos, Jr. pledged during his recent State of the Nation Address (SONA) to remove system loss charges from consumers' electricity bills, legislators and the assembled gallery of national bureaucrats rose to applaud. But whether striking system loss from electric bills will genuinely benefit Filipinos in the long run is a question whose answer is less straightforward than it appears.

The Philippines has long contended with some of the highest residential electricity rates in Southeast Asia, a burden that compounds every other cost-of-living pressure on Filipino households. Recent surveys indicate that despite the political turbulence in the Philippines, the issues most pressing to Filipinos remain the affordability of food and other basic necessities, as well as access to jobs providing adequate income. Affordability of essentials sits at the very heart of household concerns, which is why the President's promise resonated so strongly.

Understanding System Loss

According to regulators and industry representatives who testified during recent Senate hearings, system loss in energy distribution falls into two broad categories: technical and non-technical.

Technical losses are inherent to any power system. They occur because some electricity is naturally dissipated as it travels through transmission and distribution lines, transformers, and other grid infrastructure before reaching end-users. For this reason, regulators worldwide typically permit utilities to recover a reasonable level of technical losses.

Non-technical losses, also called commercial losses, stem from electricity theft, meter tampering, billing errors, and poor collection practices. Because these losses are more controllable, regulators impose stricter restrictions on their recovery, giving utilities a clear incentive to reduce theft and improve operational efficiency.

International Benchmarks

No energy system in the world is perfect. Even the most advanced countries with sophisticated infrastructure experience system losses. According to benchmarks from the International Energy Agency (IEA) and the World Bank, power grids can be classified into tiers based on the percentage of lost electricity output:

• Top-tier (efficient): Losses between 3% and 5%, as seen in countries such as Germany, Japan, Singapore, and South Korea.
• Mid-tier (standard): Losses between 6% and 9%, as in the United States, China, and Australia.
• Critical or high-loss grids: Larger percentages of system loss, often due to vast geographic distances, aging infrastructure, underinvestment, and widespread electricity theft.

Reducing system losses necessarily requires investment to address these underlying causes.

The Philippine Regulatory Framework

In the Philippines, the Energy Regulatory Commission (ERC) permits utilities to pass system loss charges on to consumers, but only within prescribed caps: approximately 5.5% to 6.5% for private utilities and roughly 12% to 12.5% for electric cooperatives. Losses exceeding these caps must be absorbed by the utility itself.

The higher cap for electric cooperatives reflects the reality that these member-owned entities serve many of the country's provincial and rural areas, where longer distribution lines, fewer customers per kilometer of line, and limited access to capital make efficiency gains harder to achieve than in densely served urban concessions like Metro Manila.

Notably, Philippine consumers see system loss listed as a separate line item on their electricity bills, a practice designed to promote transparency about where their payments go. Many other economies bundle system losses into the overall utility tariff without such itemization.

Potential Consequences of Removal

If system loss charges are eliminated entirely from consumer bills, distribution utilities would still need to recover costs that are necessary, prudent, and regulator-approved. Losses beyond ERC caps should, as a matter of principle, continue to be borne by the utilities.

However, policymakers must carefully consider how making even prudent, regulator-approved system loss costs unrecoverable could affect grid maintenance and modernization — particularly for smaller electric cooperatives with limited financial resources. Any such concerns must be substantiated by transparent financial data and weighed against consumer interests. The overarching objective is to ensure that reforms do not lead to delayed infrastructure upgrades, degraded reliability, or disrupted operations.

Policy should protect consumers while acknowledging legitimate differences in operating conditions. Private distribution utilities and electric cooperatives should be held to the same standards of efficiency and accountability, and any differentiated treatment must have a clear, technically justified basis.

The Bigger Picture: Generation Costs Drive Bills

The government's desire to ease the burden on consumers is well understood. However, the costs visible on electricity bills are not primarily charges imposed by distribution firms. The single largest driver of electricity prices is generation cost. Strategic factors — including imported coal and LNG prices, global energy market conditions, and exchange rate movements — make up the largest portion of what consumers pay, and all of these lie beyond the control of power industry participants.

The Philippines relies heavily on imported coal to fuel its power plants, leaving generation costs exposed to international commodity prices and peso exchange-rate movements. Developing domestic renewable energy and indigenous gas resources would reduce that exposure over time.

A more effective approach, the author argues, would involve developing indigenous sources of fuel and electricity to bring down generation charges. Rationalizing the value-added tax (VAT) on electricity would also deliver an immediate, across-the-board impact. Because VAT is a government-imposed tax, reducing it would directly lower consumers' monthly bills.

A Way Forward

Any meaningful reform must begin with addressing the real sources of high electricity prices. Generation charges, imported fuel prices, exchange rate fluctuations, and taxes weigh far more heavily on Filipino consumers than the transparency of system loss charges. Policy should focus on making the economy less vulnerable to these structural pressures rather than merely altering how costs appear on a bill.

A proposal of the magnitude announced during the SONA requires great caution and delicate balancing to avoid unintended consequences for both consumers and industry participants.

Victor Andres "Dindo" C. Manhit is the president of the Stratbase ADR Institute.