Waiting 20 years for P6

In your electricity bill, find the line that says “System Loss.” That is the charge for electricity that left the power plant, traveled through the grid, and disappeared before it reached your meter. Stolen by someone else. Or lost to aging wires. Or evaporated into the Metro Manila heat. You did not receive it, but you are paying for it. And for the past 20 years, you have also been paying 12% value-added tax on it.

Senator Risa Hontiveros filed Senate Bill 2076 to fix this. The bill will amend the National Internal Revenue Code to remove VAT from system loss charges on electricity bills. Her argument is sound. VAT is a consumption tax on goods and services. System loss charges represent electricity that was never delivered and never consumed. It is neither goods nor a service.

This is a 20-year-old problem. In January 2006, I wrote a column on VAT on electricity and how it was being charged on system loss as well. That was when the VAT rate was still at 10%, days before it was raised to 12% on Feb. 1 of that year. I was writing about the problem before the full rate was even locked in. That was 20 years ago, and we are still debating the matter. In those 20 years, where were Senator Hontiveros and all the other legislators questioning VAT on system loss? Why only now?

Before 2005, electricity was not exactly tax-free. Distribution utilities paid a 2% national franchise tax on gross receipts. Power generation under EPIRA enjoyed a 0% VAT rate. Republic Act 9337, the Expanded VAT Law of 2005, changed all of that, subjecting the entire electricity supply chain to VAT at 10%, then raising it to 12% in 2006. That is the rate that has remained in place for 20 years. And it is the rate we have been paying on system loss ever since.

The question worth asking today is not whether the Hontiveros bill is right. The question is how much it actually saves, and whether that is the right fight to be having in the middle of a national energy emergency. About 20 years ago, Meralco’s system loss was closer to 10%. It is roughly half that today.

Here is the math. At Meralco’s current system loss rate of 4.97%, a household paying a P1,000 electricity bill is charged roughly P50 for electricity it never received. The 12% VAT on that P50 system loss charge is P6. That is what Senate Bill 2076 saves the average household. Six pesos on a P1,120 electricity bill.

But removing VAT on the entire electricity bill, not just on system loss, would save the same household P120 instead of P6. That is 20 times the saving. The senator is fighting for the smallest fix in a set of available fixes, on a matter that has been wrong for two decades.

Why are we paying for system loss at all? The Philippines is not unusual in passing system losses to consumers. System loss occurs during transmission and distribution due to simple physics, as well as through electricity pilferage, and the ERC has set a cap on what utilities may recover from consumers.

What is unusual is how we display it. Because our law unbundled electricity charges in 2001 into separate line items for generation, transmission, distribution and system loss, Filipinos can see exactly what they are paying for losses.

In other countries, system loss is embedded in the per-kWh rate and no one argues about it because no one can see it. The Philippines is likely the only country that itemizes system loss as a distinct charge and then applies VAT on top of it. Transparency is generally good. But in this case, it made the unfairness visible, and then made it taxable.

If Senator Hontiveros wants to help with the system loss issue, one option is not just to remove the VAT on the charge but to lower the system loss cap itself. The ERC cap on system loss is currently 6.5%. Meralco’s March 2026 system loss rate was 4.97%, below the cap, and Meralco can only charge its actual rate, not the maximum allowed. World Bank data puts the global average for transmission and distribution losses at around 8% to 9%, while top-tier, well-maintained urban grids like Singapore’s operate at around 2%. Meralco’s 4.97% sits between those two benchmarks.

Pushing the ERC to reduce the allowable system loss rate to 3%, with annual reduction targets and penalties for utilities that miss them, would force distribution companies to invest in grid modernization and theft prevention rather than passing those costs to consumers indefinitely. The savings would be several times larger than removing the VAT, and the accountability mechanism would be structural rather than cosmetic.

But even that is a smaller fix than the one that is genuinely available. If Senator Hontiveros really wants to help, VAT should be removed from electricity entirely. This is the position I have held for 20 years and the energy emergency has made it more urgent.

The 12% VAT on electricity is applied without distinction to a basic utility that every household and business requires. It is the same rate applied to discretionary spending like restaurant meals and hotel rooms. That is wrong in principle, and it is wrong in practice.

Removing the VAT on electricity would save the average household P120 on a P1,000 bill, twenty times the savings from the Hontiveros bill. It would also resolve at a stroke several downstream problems we are currently trying to fix with separate, smaller interventions.

It would eliminate the EV charging tax paradox I have written about in a previous column: the situation where a driver who switches from gasoline to an electric vehicle ends up paying more in effective taxes per kilometer because the electricity VAT and pass-through fees at public charging stations were never calibrated to the energy transition goal. Remove VAT on electricity entirely, and that problem disappears.

I understand the fiscal objection. Electricity VAT generates tens of billions of pesos annually for the national treasury. The Department of Finance will not surrender that revenue without a fight, and it should not be asked to surrender it without a plan for what replaces it.

The honest answer is that the replacement should come from a rationalized excise tax on fuels, a road-use charge on electric vehicles as the fleet grows, and a broadening of the VAT base in nonessential consumption categories where the equity argument for exemption is weaker.

If full VAT removal on electricity is not immediately feasible, then the minimum acceptable position is a significant VAT reduction for all electric consumption, including public EV charging stations. Not just system loss. Not just one line item on one bill. All of it.

A reduced VAT rate of 2%, applied uniformly to electricity as a basic utility, would restore the effective tax burden that existed before the E-VAT law of 2005. That is not a radical ask. It is a return to the baseline. The 2% rate matches the pre-E-VAT national franchise tax rate. It is not an arbitrary number.

Senator Hontiveros said Senate Bill 2076 is only the first in a planned package of legislative measures to provide assistance to power consumers. A package is not enough. The target should be the removal of VAT on electricity entirely, not just on system loss. If that is not immediately feasible, then at least a reduction from 12% to 2%, applied uniformly to all electric consumption including public EV charging stations.

Twenty years of paying VAT on electricity you never received deserves more than a six-peso refund. It also requires the conversation we have been avoiding for two decades: why are we taxing a basic utility at the same rate as luxury goods in the first place?

Marvin Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippine Press Council.

matort@yahoo.com