BWorld 155, Electric cooperatives and system loss

* This is my article in BusinessWorld last Friday.

Three news reports published by BusinessWorld during the past few days indicated that the energy sector in the Philippines and its several neighbors is becoming more efficient, market-oriented, and less bureaucratic. These news articles were (1) “ERC declines to intervene in 4 Meralco power deals” (Sept. 20), “DoE says no plans to extend FiT for biomass, river projects” (Sept. 26), and “Malaysia, Thailand, Laos to sign energy-trading deal” (Sept. 26).

The first article says that the Energy Regulatory Commission (ERC) is upholding its own rule to stop intervention after a deadline for petition against any power supply agreement (PSA) has been met.

The second one says that the Department of Energy (DoE) will not extend the feed in tariff (FiT) or guaranteed high price for renewables for 20 years, for undersubscribed biomass and run of river hydro power. This move will protect electricity consumers from further high electricity prices.

The third story says that electricity trading in the three countries mentioned will mean greater power stability and more price competition among power producers. This is like expanding our Wholesale Electricity Spot Market (WESM) from national to regional trading.

To add to this list of positive news, it has also been reported that power transmission and distribution in the region have become more efficient, cutting down on system losses.

Within a decade, the Philippines, for instance, has managed to chop system losses from 12.9% to 9.4% of electricity output, an efficiency gain of 3.5% (See table).

Source: WB, World Development Indicators, Database 2017.

Based on the table, economies with low system losses have high electricity consumption per capita, except Hong Kong. And vice versa, countries with high system losses of at least 9% tend to have low per capita electricity use.

And this implies that the technology and administrative processes to bring down system losses are generally correlated with the wealth and industrialization of an economy.

There are several attempts both in Congress and the ERC to significantly reduce the distribution system loss by distribution utilities (DUs).

The ERC Draft Rules intend to make high consideration if not outright favoritism of many electric cooperatives (ECs) by giving them (a) high technical loss (mainly conductor loss and no load loss) cap of 5.5-7.0%, (b) high cap on nontechnical loss (illegal connection, direct theft, meter error, billing irregularity) of 4.5%, total of 10-12.5% distribution system loss that can be passed to consumers. In contrast, (c) private DUs will be forced to have a low technical loss cap of only 2.75%, and low nontechnical loss cap of only 1.25% or total of only 4% distribution system loss by private DUs.

This is not a good plan for the following reasons.

One, it institutionalizes a double-standard. Favoring ECs and allowing them to remain wasteful and pass the additional cost of high system loss to the consumers vis-a-vis strict monitoring of private DUs and disallowing them to pass high system losses charges to their consumers.

Two, it does not pressure or discipline the ECs and force them to become more efficient in cutting their system losses. As a result, it is not possible to bring down the system loss to the levels of Thailand, Malaysia, China, Japan, Singapore if this attitude and policy is further adopted.

Three, it does not push many inefficient ECs to be corporatized, to behave like many private corporations that are forced by SEC regulations to be more transparent.

Four, it remains silent on transmission system loss of the sole grid operator, the National Grid Corp. of the Philippines (NGCP).

Government through the ERC should create rules that apply to all players — ECs in the provinces and private DUs in big urban centers — no exceptions or favoritism, and give consumers further reduction in overall electricity prices.

Forcing both provincial ECs and private DUs to have low system loss at uniform rates is consistent with enforcing the rule of law, consistent with encouraging more competition, consistent with the spirit of EPIRA law of 2001.

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See also:

BWorld 152, Cronyism in Renewable energy, gas sectors? September 23, 2017 

BWorld 153, Property rights, trademarks and consumer protection, September 30, 2017 

BWorld 154, Kuala Lumpur, Incheon, JFK airports and lessons for the Philippines, October 01, 2017

BWorld 141, Reducing system loss, Part 2

* This is my article in BusinessWorld last Wednesday.

This is a follow up to a previous piece entitled, “Rule of law in Distribution system loss cap (June 7).” This sequel is prompted by three recent developments: (a) “NEA seeks expanded authority over electricity distributors (BusinessWorld, June 20),” (b) “DoE official backs NEA control over power distributors (BusinessWorld, June 21),” and (c) public hearing early this month by the Energy Regulatory Commission (ERC) to reduce the system loss cap of all distribution utilities (DUs).

The ERC plans to allow higher cap (maximum rate of system loss) for electric cooperatives (ECs) compared to private DUs.

In particular, the ERC plan is to impose a technical loss cap of 3.25% to 7.0% for three clusters of ECs but only 2.75% cap for private DUs and a non-technical loss cap of 4.5% of energy input for all ECs but only 1.25% cap for private DUs.

The message is that the proposed new ERC regulation is to favor ECs, all under the supervision of the National Electrification Administration (NEA), which has the effect of allowing them to incur higher wastes that can be passed on to electricity consumers while forcing private DUs to spend more on higher capex so that their system losses are reduced to the barest minimum.

The NEA and the various provincial ECs are not exactly doing well in consistently reducing the distribution system loss and raising the overall electrification rate in the country.

As of 2013, only 87.5% of all households in the country have electricity, and not all of them have 24/7 electricity, many still suffer from frequent “Earth Hours” -- that is to say power outages -- daily. (See table.)

  

The Philippines’ archipelagic geography is a contributor of course for the rather low electrification rate as many households in far away islands are off-grid and rely on generation sets administered by Napocor-SPUG and small private electricity sellers. More off-grid areas are now using solar.

Still, the absence of 24/7 electricity in many areas covered by ECs as administered by NEA is a problem. When there are frequent brownouts, people use two things: candles and generation sets. Candles are among the major causes of fires in houses and communities while gensets are noisy and are running on more expensive fuel, diesel oil.

The Philippines’ low electricity generation compared to its neighbors in the region (column 4 of the table) is a result of combination of many factors, like the huge bureaucracies face by generation companies putting up new power plants, and rigidities in the electricity distribution system.

Protecting the electricity consumers via lower distribution charge, lower system loss charge, and lower incidence of brownouts can be done via the following measures.

One, both the ERC and the NEA should identify which are the most inefficient, lowest-rating ECs or DUs, push them to be corporatized (not exactly “privatized” because ECs are already private entities). These agencies, in turn, should serve notice to these ECs that if they fail to make their operations more efficient, then they will be corporatized. With these measures, these ECs will be forced to improve their systems loss, collection efficiency, employee-customer ratio, etc.

Two, the government should remove differences in caps of systems losses between DUs and ECs. The ERC has to determine the increase in rates so that DUs can comply with their systems loss cap since they need to put up more expensive equipment to decrease technical systems loss. Having a different system loss cap for ECs and DUs means the ERC will not exactly be protecting the consumers but more of protecting ECs so that their inefficient if not outright wasteful operations are tolerated and rewarded with higher profit.

Three, NEA should not aspire to supervise all DUs including private corporations. It is not exactly good at instilling financial discipline on all ECs as a number of them are inefficient and therefore lose money while charging high costs to their consumers (See “NEA offers P1.7-B loan window for distressed power cooperatives,” BusinessWorld, April 12). NEA in fact should step back and give more supervisory functions to the Securities and Exchange Commission (SEC) via ECs that were corporatized. After all, the SEC has more transparent, more universal corporate rules than NEA.

Bienvenido S. Oplas, Jr. is a Fellow of SEANET and President of Minimal Government Thinkers. Both are members of Economic Freedom Network (EFN) Asia.

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See also:
BWorld 135, On reducing the distribution system loss, June 9, 2017
BWorld 138, PPP vs ODA, Part 2, June 21, 2017 
BWorld 139, State central planning vs household decentralized planning, June 22, 2017 
BWorld 140, Mineral rent and taxation, June 23, 2017

BWorld 135, On reducing the distribution system loss

* This is my article in BusinessWorld last Wednesday.

When matter changes form, there are certain “system loss” that occur. Like a one-kilo dressed chicken becomes less than one-kilo once it is cooked into adobo or tinola. Or a one-kilo green mango or banana becomes lighter than a kilo when it transforms into ripe, yellow mango or banana after a few days.

When electricity is transported or transmitted from a power generation company (genco) some 100+ kilometers away to a private distribution utility (DU) or electric cooperative (EC), there is a transmission system loss. Thus, a 1,000-MW output from a genco may become only 980 MW when it reaches the DU or EC.

Then when electricity is distributed from a DU or EC to houses and offices, there is also a distribution system loss. This loss is divided into (a) Technical loss, inherent in the physical delivery of electric energy including conductor loss, transformer core loss, and technical error in meters, and (b) Nontechnical Loss, energy lost due to pilferage, meter reading errors, meter tampering, others not related to the physical characteristics and functions of the electric system.

The Philippines has a relatively high degree of transmission loss + distribution loss while Singapore, South Korea and Japan have low systems losses, based on World Bank data (see Table 1).

There are several attempts to limit or cap the distribution system loss that is passed on to the consumers. One from the Energy Regulatory Commission (ERC) draft “Rules for Setting the Distribution System Loss Cap and Establishing Performance Incentive Scheme for Distribution Efficiency,” and two from the Senate. Here is a summary of their provisions.

These three measures are problematic and Sen. Pacquiao’s bill is the worst because of its populist posturing, disallowing private DUs to charge any system loss while pampering the ECs to have their system loss. Check again Table 1 above, it shows that none of the advanced countries like Singapore and Japan have zero system loss.

Sen. Gatchalian’s bill is not as bad as Sen. Pacquiao’s but like the ERC draft Rules,it suffers from some populism too, pampering the ECs with higher loss cap compared to private DUs.

Giving differentiated loss cap is favoring the ECs while penalizing private DUs and this is wrong. If the real purpose of the proposed ERC regulation and Sen. Gatchalian’s bill is to protect the consumers from high system loss charge in their monthly electricity bill, then they should slap a uniform low cap for all players, whether private DUs or ECs.

The rule of law is explicit in reminding people that the law applies equally to unequal players and people. Thus, a law against traffic counterflow should apply to all vehicles, from buses to cars, jeepneys, armored vans, tricycles and motorcycles. It should apply also to both private and public/government vehicles.

A law with penalty against non-rehabilitation of mined-out area should apply to all mining entities, whether big, medium, small and artisanal mining.

And a law or regulation on system loss cap should apply to all players, from big corporate DUs to medium or small electric cooperatives.

By slapping differentiated system loss cap, new government regulations will not be exactly protecting the consumers but more of protecting certain ECs so that their inefficient if not outright wasteful distribution system is rewarded with higher profit at the expenses of the consumers.

Ultimately, all ECs should be corporatized. They should be registered with and monitored by the Securities and Exchange Commission (SEC) and not by the National Electrification Administration because SEC has more transparent and realistic rules than NEA. But that will be another topic in the future.

For now, the rule of law, of not making exemptions and differentiation in the imposition of system loss cap, should prevail. And the loss cap that government has in mind should be realistic that DUs and ECs should not be burdened with additional high capital expenditures (CAPEX) and operating expenditures (OPEX) which ultimately will be passed to the consumers in the form of higher distribution charge.

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See also: 

BWorld 128, The quest for more stable and cheaper electricity in the ASEAN, May 08, 2017 

BWorld 131, Why the FiT-All is a burden to consumers, May 18, 2017

BWorld 132, Global commodity prices, trade and growth, May 27, 2017 
BWorld 133, Dissecting Dutertenomics' overspending plan, June 01, 2017 
BWorld 134, PPP vs ODA, June 08, 2017

Multiple Taxes on Electricity

On July 08, 2007, I wrote this in my other (now inactive) blog:

Why a tax on system losses?

Last June, our electricity bill was P3,457.00 for a consumption of 364 kwh. This was higher than our average monthly electricity consumption. The biggest items there were: (a) generation 46.6%, (b) distribution (Meralco) 20.5%, (c) transmission 9.6%, taxes 8.8%, and (d) system loss 7.7%.

The per kwh charges were: (a) generation charge P4.43; (b) distribution charge P1.16; (c) transmission charge P0.92; (d) system loss charge P0.73.

System loss, in my understanding, arise from (a) electricity uses of the power generating plants, transmission lines, and perhaps by distribution utilities like Meralco, and (b) pilfered electricity passed on to legitimate users. I am just wondering why is government imposing a tax on electricity that was not used by users, whether residential, industrial or commercial.

The government VAT rate for the following are as follows: (a) generation charge 9.56%; (b) transmission charge 10.65%; (c) distribution charge & subsidies 12%; and (d) system loss charge 9.76%. In our case, out of total of P305 VAT collection, P89.56 was VAT on system loss. 

VAT is a tax on value-added. When a tomato is transformed and processed into tomato paste then tomato sauce or ketchup, there was “value added” to the consumer who bought and consumed the tomato ketchup. Thus, the consumer is billed by the government a tax on the values added to the raw tomato. When a chicken was transformed and cooked into chicken adobo or chicken cube, there was “value added” to ordinary dressed chicken.

But when an electricity was used by a power plant or a transmission line, or stolen by some people, there was zero value added to legitimate electricity users because they have already paid the generation charge, transmission charge, and distribution charge. We can possibly call this “value subtracted”, not “value-added”, because consumers were billed for an electricity they never used. Consumers could tolerate this. But when government imposes a tax on an unused electricity (or other services), this is adding salt to the injury.

I hope this analysis is wrong. Otherwise, I will conclude that this practice by the government is just one of those numerous rip-off and robbery of consumers and taxpayers.

Then I followed it up the next day, July 09, 2007:

Value-Subtracted Tax (VST), not VAT

This anomaly of taxing unused electricity (or water or other services) should be reviewed by the BIR, and/or Congress, the House of Reps. especially. I think this defect was made in the expanded VAT law's implementing rules and regulations (IRR).

My friend and former classmate from UPSE, Raymund Addun, concocted the term Value Subtracted Tax or VST (short for vuwisit), which jibes with the ugly practice of government taxing value-subtracted, not value-added, service. Raymund added that "Its like we're short changed (or better short circuited) from the start."

My posting yesterday was not against charging to consumers the system loss. The consumers could tolerate it. I could tolerate it. With those stolen electricity by some people, especially in squatter areas in cahoots with some Meralco people actually, someone has to pay, and that's the legitimate electricity users. It's part of enduring the negative externalities of being provided electricity by a natural monopoly.

In the case of taxing system loss, the villain is not Meralco but the government.Charging to consumers system loss is already painful. Taxing that unused electricity makes it doubly painful.

Last month, our electricity bill was P3,470 for the 323 kwh consumed. It was higher than our usual monthly bill. Here is the breakdown of costs, in descending order:

1. Generation charge, P4.862/kwh, P1,571

2. Distribution charge, P1.724/kwh, P557

3. Transmission charge, P1.076/kwh, P348

4. Government taxes, (from 8 to 12%), P323

5. System loss charge, P0.656/kwh, P212

6. Supply charge, P0.635/kwh, P205

7. Metering charge, P0.466/kwh, P150

8. Subsidies, P0.139/kwh, P 45

Others (fixed supply charge, fixed metering charge, universal charges,...)

T O T A L P3,469.80

As usual, my main beef is the high government taxes, VAT (P307) + local franchise tax (P16), representing 9.3 percent of our total bill. The VAT applies on generation, distribution and system loss. Transmission is VAT-exempt.

I have argued above that passing on the system loss (including those stolen and unpaid electricity) to the public is somehow unfair, but taxing the system loss is adding insult to the injury. The government is so callous that it even taxes electricity that was never used by the consumers.

And don't forget, power generation companies, power transmission company/ies and power distribution companies pay various taxes to the government -- corporate income tax, VAT, franchise tax, documentary stamp tax, real property tax, business permit fees, etc.). All those taxes are costs that they already pass on to the consumers and reflected in the per kwh charge that they bill us.

If those taxes on those companies are added to the direct taxes consumed by the public, I will not be surprised if they reach nearly 20 percent of our total bill.

Yes, government cares a lot for us. It makes things more expensive and more costly for us. Long live BIG government.