System losses as free lunch

I first heard about the TANSTAAFL principle—for “there ain’t no such thing as a free lunch”—from a visiting American economics professor back in my college days. Politicians, I wrote last week, often seem to be the last to understand this principle—or even if they do, they simply don’t care just as long as it’s not they who will pay. I think the Philippines’ perennial difficulty with achieving and sustaining economic dynamism and social progress traces to politicians and policymakers who just don’t understand the true costs and benefits enough of policies and measures they promulgate.

I mentioned three last week: a hefty minimum wage hike, removing system losses from consumers’ electricity bills, and expansion of unconditional “ayudas” and subsidies. We’ve had countless examples over the years, which had in fact motivated the title of this column when I started it over two decades ago. I recently wrote on the wage hike (see “Minimum wage woes,” 7/28/26), and likened the last minimum wage adjustment to a shotgun that harms far more than its intended beneficiaries, while targeted, rifle-focused measures make better sense. I have been writing and will write more on “ayudas” in future columns as I continue sharing findings of a study I led in a third-party assessment that the Department of Social Welfare and Development commissioned last year.

My focus here is on the system loss issue, which is ultimately about fairness and practicality. The problem with President Marcos’ recent call for what sounded like a blanket removal of all system loss costs from customer bills is that part of it is an inherent and unavoidable cost determined by the natural laws of physics, not by human actions. These are the technical losses that occur as electricity is transmitted and distributed through copper or aluminum wires, where the electric energy meets some resistance and turns into heat and is lost. Similar losses occur within the distribution transformers that convert very high voltages in transmission lines to the safer voltage levels fed to end users (220 volts in our case). According to the Council of European Energy Regulators, the consensus estimate among industry engineers on baseline unavoidable technical losses in efficient distribution systems is 4-6 percent of total transmitted power.

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On top of these technical losses are nontechnical losses, from electricity delivered to the grid but are unbilled or unpaid for various reasons: line theft, tampered meters, meter inaccuracies, billing errors, or persistent nonpayment and default by customers. These losses are preventable, but can be very difficult to eliminate, especially in the Philippines, where sadly, honesty cannot be taken for granted unlike in places like Japan, Singapore, and Germany, where nontechnical system losses are indeed negligible. Furthermore, in a country where it’s often joked that laws are mere suggestions, weak law enforcement encourages the rampant dishonesty that has raised nontechnical system losses. Perhaps in acceptance of this reality, the Energy Regulatory Commission (ERC) had traditionally permitted recovery of both technical and some nontechnical system loss in consumers’ electricity bills. For private distribution utilities like Manila Electric Co. (Meralco), there is a cap of 5.5 to 6.5 percent on what they can charge to consumers, and for rural electric cooperatives, 8.25 to 12 percent.

All this means that while customers pay prices that include the legitimate cost of technical system losses, they also unfairly bear costs due to dishonesty of electricity thieves. Power distribution utilities can invest in smart metering systems, more underground cabling and other distribution system improvements to help curb these losses. Government rules must impel them to undertake these investments and not encourage complacency by allowing them to pass these costs entirely to honest consumers. But to be fair, the government must do its part to enforce the law and prevent and properly penalize line pilferage via jumpers and tampered meters.

So how do we move forward? The President’s pronouncement on removing all system losses from consumer bills cannot be taken literally, especially with struggling rural electric cooperatives operating with much higher system losses of both kinds (reportedly up to 28 percent). For them, the approach must be phased reduction in their cap on recoverable system loss costs to avoid driving them into bankruptcy while being led over time to invest in technically feasible loss-reducing improvements. Meralco is already within world standards in system losses and can well afford current ERC caps, and some further reduction therein to impel further loss-reducing improvements.

It bears repeating that the government must do its part on proper law enforcement to curb system losses of the nontechnical kind. We cannot give electricity thieves a free lunch.

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