The Energy Regulatory Commission (ERC) approved a Resolution declaring the system loss charge as an inherent government-mandated pass-through cost that does not form part of the gross sales of Generation Companies (GCs), the National Grid Corporation of the Philippines (NGCP), and Distribution Utilities (DUs) for Value-Added Tax (VAT) purposes.
This measure, which if confirmed by the Bureau of Internal Revenue (BIR), is expected to remove the VAT on system loss that currently appears in the electricity bills and help lower electricity costs for consumers.
“The allowable system loss charge will be considered as not forming part of the gross sales subject to the 12% VAT.”
Under the Resolution, the allowable system loss charge will be considered as not forming part of the gross sales subject to the 12% VAT under the National Internal Revenue Code (NIRC) of 1997, as amended.
The exclusion will apply prospectively following the publication of the Resolution and upon the effectivity of the appropriate confirmatory issuance from the BIR.
System loss refers to electricity that has been generated and paid for but is physically lost during the distribution of electricity before reaching end-users. Under the existing regulatory framework, only allowable system losses within the ERC-prescribed caps may be recovered through the system loss charge reflected in electricity bills. System losses incurred in excess of the approved caps remain non-recoverable from consumers and must be borne exclusively by the concerned DUs.
“The system loss charge represents the recovery of costs associated with allowable system losses under the regulatory framework, rather than revenue earned from the sale of electricity or the provision of services.”
By clarifying the regulatory nature of the charge, the ERC emphasizes that the system loss charge represents the recovery of costs associated with allowable system losses under the regulatory framework, rather than revenue earned from the sale of electricity or the provision of services.
“The allowable system loss charge is a government-mandated pass-through cost. It is therefore appropriate that it should not form part of the VAT base,” ERC Chairperson and CEO Atty. Francis Saturnino Juan said.
The ERC noted that system loss comprises technical losses in conductors, transformers, and other distribution equipment, as well as non-technical losses such as pilferage, illegal connections, and meter tampering.
The Commission regulates this cost recovery through the System Loss Rate (SLR) adjustment mechanism and applicable system loss caps.
To ensure transparency, all DUs will be required, within sixty (60) days from the effectivity of the Resolution, to modify their billing formats to separately and distinctly reflect the system loss charge as a government-mandated line item that is not subject to VAT.
