Household electricity rates will increase 8.9% in April, to 51.11 agorot per kilowatt-hour for households before VAT, the Public Utility Commission - Electricity announced on Thursday.

The state will also provide support for the Israel Electric Corporation, which is facing severe financial problems. The company will also be required to take efficiency measures and cut operating costs.

The IEC has warned that without government help, and soon, Israelis may face blackouts during this summer's heat.

The immediate reason for the big price hike is a shortage of natural gas, which has two causes: The repeated suspension of Egyptian gas supplies due to attacks on that country's pipeline in the Sinai after the ouster of foremr Egyptian President Hosni Mubarak just over a year ago; and the near-depletion of the offshore Tethys Sea gas fields.

As a result of the natural gas shortage, the country's generating plants are reverting to more expensive - and dirtier - fuels, particularly diesel. The IEC has been ordered by the Environmental Protection Ministry to restrict its use of even more-polluting alternatives such as heavy fuel oil and bunker fuel.

The price hike, decided in January, was originally scheduled to be "only" 6.6% for all of 2012 and 13.4% over three years. But current predictions are for a rise of 18% over the next three years, including a 3.6% increase next year and a 4.7% rise in 2014. But after January it was determined that the Tethys Sea reserves were running out ahead of schedule. That meant buying more replacement fuel, at an additional cost of around NIS 3 billion this year alone. The realization forced the regulators and IEC representatives back to the table and into new calculations for the rate hikes.

As to how the state will help bail out the IEC and help it find the money it needs to pay the bills now, a number of measures were agreed to.

The treasury will guarantee a short-term bond issue by the IEC of NIS 1.5 billion, which will be held within a few weeks without a prospectus. In June, after the IEC publishes a prospectus, the state will guarantee an additional bond issue of up to NIS 5 billion.

The IEC will also be allowed to use employee tax deductions as a financial cushion to buy fuel for its generating plants before handing the money over to the treasury. This will provide the company with another NIS 200 million in liquidity. Another NIS 600 million held in special funds for an emergency program of building power stations will be freed up for buying fuel.

The utility regulator's calculations actually required an immediate 35% hike in rates due to the higher fuel costs. But it was decided to phase this in gradually and avoid such a huge increase - and not to raise rates by more than 10% at the moment.

The current increase includes 1.2% for the costs of electricity transmission infrastructure that was not included in the original hikes, but was planned to take effect in coming months. In any case, it was decided to bundle all the increases into one package.

The IEC has been told to cut NIS 400 million in operating costs in 2012, as well as to immediately dip into a NIS-550-million fund for employee benefits such as free electricity. The board of directors discussed using this money at Thursday's meeting.

The fund for employee benefits holds NIS 2.1 billion, and the state says there is no legal problem using this money for purchasing fuel - though the union representing IEC employees may not agree. The legality of the matter is now being examined.