Meralco (PSE: MER) has long been viewed as one of the Philippine stock market’s most defensive companies. Electricity demand remains relatively stable across economic cycles, its distribution franchise extends until 2053, and its growing power generation portfolio has provided another source of earnings.
That perception changed abruptly after President Ferdinand Marcos Jr. called for the removal of system loss charges from consumers’ electricity bills during his 2026 State of the Nation Address.
Meralco’s share price fell sharply after the announcement, extending a decline from its earlier high of nearly ₱700. The selloff reflected a legitimate concern: if Meralco could no longer recover system losses from consumers, the company might have to absorb the cost itself.
What system loss really means
System loss refers to electricity that a distribution utility purchases but is unable to bill to customers. Part of it comes from unavoidable technical losses as electricity travels through wires, transformers and other network equipment. The remainder may come from meter inaccuracies, illegal connections and electricity theft.
Meralco’s actual system loss stood at 5.85% in 2025, below the 6.5% regulatory cap. The company said this lower loss rate resulted in about ₱6.5 billion in customer savings.
Under the present regulatory framework, Meralco can recover system loss charges subject to a cap imposed by the Energy Regulatory Commission. Generation, transmission and system loss charges are treated as pass-through items rather than sources of profit for the distribution utility.
Removing the system loss charge would not eliminate the lost electricity. Generators would still have to be paid for the power supplied. The proposal would merely determine who ultimately bears the cost.
President Marcos called on lawmakers to amend the Electric Power Industry Reform Act so that system loss charges and the related value-added tax would no longer be passed on to consumers. Meralco subsequently said it could not yet quantify the impact until the amendments and implementing rules had been finalized. This leaves investors with several possible outcomes.
How much could Meralco lose?
Meralco’s distribution utility sold 53,257 gigawatt-hours of electricity in 2025. Its average retail rate reached ₱11.81 per kilowatt-hour, with generation accounting for about 64% of the total rate.
This implies an estimated average generation cost of approximately ₱7.56 per kilowatt-hour.
Assuming a rounded 5% system loss, Meralco would need to purchase about 56,060 GWh to sell 53,257 GWh to customers. The difference of approximately 2,803 GWh represents electricity lost before it could be billed.
At an estimated generation cost of ₱7.56 per kilowatt-hour, the annual cost of the lost electricity would reach approximately ₱21.2 billion.
If Meralco had to absorb the entire amount and the cost remained deductible for income tax purposes, the after-tax impact could reach approximately ₱15.9 billion. This would be a significant blow.
Meralco reported attributable net income of ₱51.13 billion in 2025, consolidated core net income of ₱50.57 billion and earnings per share of ₱45.36.
A full ₱15.9 billion after-tax loss could reduce attributable net income to approximately ₱35.2 billion. EPS could fall to about ₱31.27, or roughly 31% below its 2025 level.
Return on equity would also decline sharply. Meralco ended 2025 with ₱173.14 billion in equity attributable to shareholders and reported an ROE of approximately 30%.
Under the full-absorption scenario, ROE could fall toward 20%.
Meralco would remain profitable, but it would no longer have the same earnings profile that previously supported its premium valuation.
What if Meralco absorbs only part of the cost?
A partial burden may be more realistic than immediate full absorption.
If Meralco were required to absorb 25% of the estimated system loss cost, the after-tax reduction in earnings would be approximately ₱4 billion. Net income could decline to around ₱47.2 billion, EPS to approximately ₱41.84 and ROE to about 27%.
At 50% absorption, the after-tax earnings reduction could reach nearly ₱7.9 billion. Net income could fall to approximately ₱43.2 billion, while EPS could decline to about ₱38.32. ROE could fall toward 25%.
At 75% absorption, net income could decline to approximately ₱39.2 billion. EPS could fall to around ₱34.79, while ROE could drop to about 23%.
These figures suggest that Meralco could withstand partial absorption without losing its financial strength. The problem becomes more serious as the burden approaches 100%.
The stricter interpretation would use Meralco’s actual 2025 system loss rate of 5.85% rather than the rounded 5%.
Under that assumption, the cost of unrecovered electricity could approach ₱25 billion before tax and approximately ₱18.8 billion after tax. Net income could fall to around ₱32.4 billion, EPS to roughly ₱28.72 and ROE to below 19%.
This would represent the harshest plausible outcome based on 2025 operating figures.
Dividends would also come under pressure
Meralco’s regular dividend policy provides for the distribution of 50% of consolidated core net income. The company may also declare special dividends depending on the availability of free cash and unrestricted retained earnings.
Meralco declared dividends of ₱28 per share out of its 2025 earnings.
Without any earnings loss, the regular dividend based on 50% of core net income would be approximately ₱22.43 per share. The balance of the ₱28 declared dividend came from the special-dividend component.
Under a 25% absorption scenario, regular dividend capacity could decline to approximately ₱20.67 per share.
At 50%, it could fall to around ₱18.91.
At 75%, it could decline to approximately ₱17.15.
Under the full-absorption scenario, regular dividend capacity could fall to about ₱15.38 per share.
The actual dividend could be higher if management continued to declare special dividends, but that may become less likely if the company needs to preserve cash for network investments, debt repayment and its expanding power generation portfolio.
Meralco ended 2025 with total debt of approximately ₱230 billion, up sharply from the previous year because of investments in generation and renewable energy projects.
A permanent reduction in distribution cash flow could therefore affect more than dividends. It could also influence future capital spending and financing decisions.
Meralco is no longer only a distribution utility
Distribution accounted for approximately 58% of Meralco’s 2025 consolidated core income. Power generation contributed 33%, while retail electricity supply and other businesses accounted for the remaining 9%.
This means a loss in the regulated distribution business would not reduce consolidated earnings peso for peso.
Based on Meralco’s ₱50.57 billion core income, the distribution segment contributed an estimated ₱29.3 billion. A full after-tax system loss burden of ₱15.9 billion would eliminate more than half of that contribution, but generation and other businesses would continue to provide earnings.
Meralco PowerGen has become increasingly important to the group. MGen operates a diversified portfolio across thermal, liquefied natural gas and renewable energy, while Meralco is also developing the large-scale MTerra Solar project.
Continued growth from these businesses could offset part of the regulatory impact over time.
Has the market already priced in the worst case?
The selloff in Meralco reflects more than an immediate earnings cut. It represents a higher regulatory risk premium.
Investors do not yet know whether the government intends to prohibit all recovery of system losses, remove only non-technical losses, reduce the regulatory cap gradually or allow the cost to be recovered through another part of the distribution tariff.
These alternatives would produce very different financial outcomes.
At 25% absorption, Meralco’s earnings, ROE and dividends would remain relatively strong. At 50%, the effect would become material but manageable. Only under the full 5% to 5.85% absorption scenario would the company face an earnings decline of roughly one-third and a possible reduction in regular dividends toward ₱14 to ₱16 per share.
The market may therefore be pricing in a meaningful probability of the worst case before the law has even been written.
This does not automatically make Meralco cheap. Regulatory uncertainty can remain over a stock for a long time, particularly when the rules determine how much capital a utility can recover and how much return it is allowed to earn.
However, the financial impact is now easier to frame.
The removal of system loss charges would not destroy Meralco’s business. But full absorption could materially weaken distribution earnings, reduce ROE and place pressure on dividends. Partial absorption would be painful, but the group’s generation and other businesses could absorb much of the shock.
For now, Meralco’s future value depends less on whether system loss will disappear from the electricity bill and more on where the government ultimately decides that cost should go.
