A system and method for detecting excess voltage drop (EVD) in a three-phase electrical distribution circuit includes a diagnostic system comprising a processor that is programmed to receive three-phase voltages and currents provided to terminals of the electrical machine, determine fundamental components of the three-phase voltages and currents provided to the terminals, and compute positive, negative, and zero sequence currents from the fundamental components. The processor is also programmed to extract a compensated negative sequence current from the negative sequence current component, add the compensated negative sequence current to the positive sequence current to determine fault reference current phasors, determine a negative current reference phase angle for each phase based in part on a phase angle of the positive sequence current, and identify an EVD fault in the electrical distribution circuit based on the compensated negative sequence current, the fault reference current phasors, and the negative current reference phase angles.