Every peso counts: Understanding the VAT relief on system loss charges

Every month, I receive an email from the Manila Electric Company and, like many consumers, instinctively look for the figure that matters most—the amount due. Rarely do I pause to scrutinize the various charges that make up that total. After all, electricity bills are often viewed as less as something to be read and more as something to be paid.

Yet a closer look at the electric bill reveals several line items that most consumers, myself included, seldom pay attention to. One of these is the system loss charge. 

What is system loss?

System loss refers to the electricity that has already been generated and paid for but is lost before it reaches consumers. This loss may be technical, arising from inherent physical loss in the conductors, transformers, and other equipment due to its normal operation, or non-technical, arising from electricity pilferage, illegal connections, meter tampering, and other illicit usage of electricity. 

Because such loss is an unavoidable reality of power distribution, the Energy Regulatory Commission (ERC) allows distribution utilities (DUs) to recover a portion of this cost through the system loss charge reflected in consumers’ electricity bills. In practice, DUs collect the system loss charge from consumers and remit the same to the concerned Generation Companies (GenCos) and the National Grid Corporation of the Philippines (NGCP) as reimbursement for the cost of electricity generated but lost during transmission and distribution. 

This does not mean, however, that consumers are automatically made to shoulder all electricity losses. To balance cost recovery with consumer protection, the ERC prescribes allowable system loss caps. Only losses within these regulatory thresholds may be recovered from consumers, while losses in excess of the prescribed limit must be absorbed by the distribution utility itself.

System loss charge is not income 

Given the pass-through nature of system loss charge, ERC Resolution No. 26, series of 2026, clarified that the collection of allowable system loss charge does not entitle DUs, GenCos, or the NGCP to any additional profit, margin, gain, or return. Rather, these entities merely facilitate the collection and remittance of amounts intended to recover the cost of electricity that was physically lost and never actually delivered for consumption. As such, this amount does not constitute revenue earned or compensation by these entities for a separate service rendered to consumers. The amount corresponding to the allowable system loss does not then become unrestricted funds available for the use or benefit of the DUs

Recognizing this character, the Bureau of Internal Revenue (BIR) subsequently issued Revenue Memorandum Circular (RMC) No. 97-2026, which adopted and circularized the ERC’s position. Under the said RMC, allowable system loss charge, within the ERC-approved cap, is treated as government-mandated pass-through cost that does not form part of the gross sales of generation companies for value-added tax (VAT) purposes. Consequently, this charge is excluded from the VAT base and is no longer subject to output VAT.

The relief is on the tax, not the charge 

While RMC No. 97-2026 removes VAT from system loss charge, it is also important to emphasize what the said issuance does not do. 

The said RMC does not abolish the system loss charge per se, nor does it remove consumers' obligation to shoulder allowable system losses recognized under ERC regulations. Consumers will continue to see a system loss charge reflected in their monthly electricity bill, but the portion of that charge falling within the ERC-approved cap will no longer be included in the VAT base. The relief therefore applies not to the charge itself, but to the VAT previously imposed on that covered amount.  

So, how much does it actually save? 

To illustrate, suppose that my electricity bill for the month of September includes an allowable system loss charge of Php190.26. 

Prior to RMC No. 97-2026, VAT formed part of the charges attributable to allowable system losses. As such, the Php190.26 system loss charge carried a corresponding VAT of Pph18.38 (which reflects the actual VAT computed for the system loss component under the electricity billing framework and not a direct 12% calculation of the stated system loss charge), thereby increasing my total amount payable to P208.64.  

Following the issuance, I would still continue to pay the Php190.26 system loss charge, but would no longer bear the Php18.38 VAT previously attributable to that allowable system loss component. In effect, my savings for this billing period would amount to Php18.38.  

It is important to note, however, that the actual savings will vary depending on the amount of the allowable system loss reflected in a consumer’s electricity bill. 

The Department of Energy (DOE) estimates that for an average household consuming around 200 kilowatt-hours per month, the VAT removal could translate to at least Php20.00 in monthly savings. 

While the amount may appear immaterial when viewed against an entire electricity bill, BIR Commissioner Atty. Charlito Martin Mendoza emphasized that every peso saved by consumers counts. The issuance of RMC No. 97-2026 forms part of a broader effort to alleviate the burden of rising electricity costs and provide tangible relief, however incremental, to consumers. 

Relief for consumers, compliance for distribution utilities 

On the other hand, the VAT relief on system loss also carries corresponding compliance obligations for generation companies. 

For the allowable system loss charge to qualify for exclusion from gross sales for VAT purposes, the charge must be separately identified in the billing statement, invoice, or similar document in accordance with ERC rules and regulations.

To implement this policy, the ERC subsequently issued Resolution No. 28, Series of 2026, adopting a revised billing format for distribution utilities, generation companies, the NGCP, and electric cooperatives. The revised format is intended to clearly identify government-mandated pass-through charges, including allowable system loss charges, that are not subject to VAT.

The removal of VAT on allowable system loss charges will not dramatically reduce electricity bills overnight. Consumers will continue to pay system loss charges within the limits prescribed by the ERC, and those charges will remain a familiar line item in monthly billing statements. The key development is the recognition that these amounts are merely pass-through costs rather than revenue earned by power industry participants. 

More importantly, RMC No. 97-2026 reflects a conscious effort to provide relief to consumers by ensuring that VAT is imposed only on amounts that properly form part of a taxpayer's sales or income. For an individual household, the savings may amount to only a few pesos each month. But when those savings are multiplied across millions of consumers and businesses, the impact becomes more meaningful.

After all, every electric bill tells a story beyond the amount due. And sometimes, a closer look at a seemingly overlooked line item reveals that every peso saved truly counts.

As published in BusinessWorld, dated 22 September 2026