Regulator reduces systems loss cap—but only in January 2010

The Energy Regulatory Commission (ERC), the government body which regulates the electricity business, has recently issued an order lowering the cap on electricity system loss to 8.5% down from the present mandated 9.5%--but only starting January 2010. In the same order, the limit for electric cooperatives is reduced to 13% from 14%.

The systems loss, which includes electricity lost to pilferage, antiquated equipment, design faults, administrative inefficiency and actual physical losses in the conductors, is currently passed on to the customers as added cost by distribution utilities at the allowed rate.

Charging of systems loss to the users has been under attack as being unfair from consumer groups, businesses and some government officials.

The recovery of a portion of systems loss by power utilities is allowed under Republic Act 7832 which also penalizes electricity theft.

In a statement, the ERC is also “reviewing other existing policies pertaining to rate-setting, including efficiency models [and] lifeline components of other distribution utilities and the different cost-recovery adjustment mechanisms”.

Republic Act 7832 or the law penalizing electricity theft allows power utilities to recover a portion of their system losses from consumers.

The current loss cap of 9.5% for private utilities and 14% limit for electric cooperatives have been implemented since 1999 and 2000, respectively, without adjustment.

This corner has maintained that a systems cap loss of 7% is fair, achievable and already generous under present inefficiencies, and distribution companies should strive for a systems loss of only 5%. The former figure is the average systems loss in EU countries, which is already high because it is inflated by the inefficient utilities in new member countries from Eastern Europe.

Some distribution companies in the Visayas and one or two cooperatives have actually claimed that they have achieved systems loss of below the mandated 9.5%.

The reduced cap for electric cooperatives is more of a token gesture than a real attempt at forcing more efficiency on these energy dodos. The cap for them should be ultimately aligned with those of the private distribution utilities. A viable option would be to require them to have a systems loss reduction by 1% every year until they achieve parity with the private sector. That could be done in four or five years. A carrot in terms of tax breaks and incentives for equipment upgrade should also be dangled to them.

In summary, the proposed reduction is systems loss cap that could be passed on to consumers is way too high and would unlikely to be felt by the average consumer.

Reducing electricity systems losses : hard but doable

Early this month, the Energy Regulatory Commission (ERC) issued a draft resolution for public consultation mandating that, among others, the electricity of a distribution utility (DU) is to be treated as an expense and not part of a systems loss, and lowers the maximum recoverable rate of system loss from 9.5 percent to 8 for DUs and from 14 percent to 11 for electric coops, based on the total kilowatt-hour (kWh) generated, purchased and distributed.

This is a welcome development, for the ERC and previous electricity price regulatory bodies have not adjusted the systems loss caps for almost a decade. The high systems loss cap was also pinpointed as one of the reasons for the high power costs exposed during the high of the controversy between GSIS president Winston Garcia and Meralco.

Earlier, we have proposed a stretch target of 5% and an implied reasonable target of 7%, based on the average systems loss of European Union countries. We also maintain that the cooperatives should be treated like any other private DUs which means that they should also have the same caps.

We also reiterate that these business dinosaurs be sold off to private investors.

As to be expected, the distribution utilities cry wolf, saying that this could lead to huge losses.

Aboitiz Power Corp. president Erramon Aboitiz said that its unit the Visayan Electric Company, the DU servicing Cebu City and province, is within the current 9.5% cap, but reducing this to 8 % the company would have to book losses of some P 100 million.

However, he didn't say that it is not doable. In fact, he said that you can reduce systems loss by investing, but one has to make a decent return. Of course.

This was echoed by another Aboitiz firm Davao Light & Power Co. (DLPC) vice president Bienamer Garcia said the proposed lowering of the system loss "would entail a lot of cost” , but the firm's system loss level as of end-June 2008 already stood at 7.91 percent, just within the proposed 8 % cap.

The Aboitiz units want incentives. Fine. But the incentives (e.g., tax breaks for capital importation) should be for improvements specifically targeting reduction of systems losses at the same time that the systems loss caps are lowered.

Garcia said that there is already a performance-based mechanism in place and all that ERC should do is to align the proposed new cap with this.

“Let businesses figure out how to reduce those losses, then give incentives. When you give incentives, you start seeing what people can do. For me, it’s better to provide incentives to companies to reduce system loss,” Aboitiz said.

Amen.

Setting the electricity system loss charge cap

THE ENERGY Regulatory Commission yesterday said it will study the reduction of the cap for system losses that the distribution utilities can be passed on to end-users, an issue that has been highlighted during recent the not-so-covert attempt of GSIS head Winston Garcia to wrest control of Meralco from the Lopezes. The ERC also considers the phase-out of the inclusion of utilities’ own use of power in systems loss calculations.

In a press briefing, ERC chairperson and chief executive officer Zenaida G. Cruz-Ducut said that she has directed her staff to study the possible reduction of the system loss caps and the phase out of the company use as part of the determination of system loss.

"It is high time that we review these caps and possibly reduce them in order to help alleviate the burden to the consumer of these charges." Ms. Ducut said.

Well said, but the statement has long been overdue.

At present, the systems loss cap that can be passed on to consumers stands at 9.5% for distribution utilities and 14% for cooperatives. The wide disparity is an open admission that cooperatives are far more inefficient, and our policy makers continue on tolerating it.

Republic Act 7832, or the Anti-Pilferage Law allows distribution utilities and electric cooperatives to recover their costs for system losses, or electricity lost through technical loss or power theft.

Note that the law specifically includes electricity pilferage, which means that we consumers are actually rewarding the thieves by paying for them.

Any electrical or mechanical device, whether it is a refrigerator, a car or the whole distribution grid, would have technical losses due to friction, heat losses, equipment inefficiency, and many others. That is physics.

But if we include avoidable losses such as theft that is a different story altogether. Other avoidable losses also include antiquated power lines and obsolete equipment that add to systems losses.

So, what should the systems loss cap be? Or is it necessary in the first place, and just let the distribution company book it as part of its operating expenses?

In practice there is a wide range of percent systems loss, from an average of 7 % for European Union to as high as 25% or more (one country reported a 43% loss) in poor countries of Africa, Central America and Asia. Note that the low number for EU countries is average; which means some of these countries are doing better than that. Furthermore, the figure includes pilferage, although the instances are far lower than ours.

Also, the Anti-Pilferage Law allows a 1% allowance for the distribution utilities' own use, the so-called house load, which includes not only power for start-up generators and other electrical equipment, but also offices, warehouses and even hospitals ("These are also part of the cost of doing business," as one official from a distribution utility remarked).

To get some idea on the magnitude of this seemingly innocuous amount, assume that Meralco handles 5,000 MW (the actual number is different but this is for illustration). One percent of that is 50 MW, enough to power a mid-sized entire province. Meralco incorporates just 0.27% on its charges.

So, all along, we have been ripped off by the distribution companies with the government, through the antiquated laws still in existence, looking the other way.

Passing on charges to consumers--in effect, subsidizing the distribution companies in this case--has long been a hallmark of the present and all the previous governments. We have noted here all along that subsidies, in any form do not make economic sense.

For subsidies to public utilities, even on the pretext of helping the consumers, only exacerbate inefficiency.

If you were to ask me what the numbers should be, that number should be based on what the physical (from the word physics) practicable, not theoretical, limits allow. Also, ideally it should be a stretch, not a leisure target. It is amazing how one could achieve, if given stretch targets.

By all means let us encourage the distribution companies and cooperatives to be more efficient by giving incentives to technical upgrades and theft reduction.

The cap should also factor out pilferage in the equation.

Just give me the numbers, you say.

Okay, for a start, the number should be less than the average for the cited number from EU countries which we assume should be a working distribution system. What about 5%?

For the own-use number, the Meralco figure of 0.27 % is likely to be bloated. It should have already incuded the power used by Meralco Theater (a good place to watch the performing arts) and its expensive medical facilities. I suggest 0.1 %.

What about the cooperatives?

Nah, the present numbers are already herculean tasks to them. My suggested numbers would be pure theory.

I would rather see these cooperatives sold to the private sector starting with the bigger cooperatives, especially some of the loss-making ones but still charging stratospheric amounts still operating in the Bicol area.

I can sense that the Meralco linesmen are on the way to cut my electricity supply.