Gov’t, Israel Electric Corp., Unions Reach Agreement on Reform of Power Sector

Deal calls for dismantling part of state-owned IEC’s monopoly, laying off workers and reducing expenses. Program will cost an estimated 5 billion shekels to implement

Lightning strikes over a power plant belonging to Israel Electric Company in Ashdod.
Ilan Assayag

After more than two decades of fruitless efforts to reform Israel’s electricity industry, the government, the Israel Electric Corporation and labor unions reached an agreement in principle early Wednesday on a wide-ranging program to introduce more competition and cut the IEC’s bloated expenses.

The agreement still lacks a lot of details, which the sides plan to work out over the next 45 days before reaching a document they will sign, but the proposal will be submitted to the cabinet for approval already on Sunday.

“After decades, the monopoly era is over,” said Finance Minister Moshe Kahlon at a press conference Wednesday. “The historic reform reached today after 20 years of efforts will increase competition, bring a dramatic increase in IEC’s efficiency and later on reduced electricity rates for consumers.”

The state-owned IEC is not quite a monopoly because a host of private sector power companies have emerged in recent years, but it retains a tight grip on a key sector of the economy.

Critics contended that IEC, like other government monopolies, is dominated by powerful labor unions, is inefficient and poorly run.

It has also run up huge debts over the years that now amount to 42 billion shekels ($12.1 billion). The reform proposals aims to reduce that to 28 billion shekels.

The broad terms of the reforms, which will be rolled out over a period of eight years include three main areas.

Industry structure: IEC will retain its monopoly in power transmission and distribution, but its power-generating business will be moved into a newly formed subsidiary and the segment gradually opened up to more competition.

Specifically, the utility will sell five existing gas-fired power stations and transfer land designated for two more to the government. IEC will be able to build two new stations, but only after it has divested the five stations to ensure that its share of power production doesn’t grow.

The idea of putting IEC’s electricity-generating business into a separate unit was to prevent cross-subsidization with its transmission monopoly. But sources said it was also being down with the idea of eventually forcing IEC out of the generating business altogether.

The business of system management and planning will be spun off into a newly formed government-owned company. Sources

Labor issues: IEC will reduce its employee headcount by 2,800, of which 1,800 will be laid off and another 1,000 leaving through natural attrition, so that by the end of the process it will have a payroll of about 8,500.

That jobs cuts will come at a cost. Employees who are laid off will get a 1,250 shekel a month supplement to their pensions and those who stay on a 1,700 shekel addition. They will also get a one-time bonus of between 10,000 and 30,000 shekels per worker for agreeing to the reforms, even though officials had vowed they would never consent to a payout like that.

A key component of the payments is that the treasury will only pay them as IEC meets milestones for implementing the reforms, as demanded by Eran Yacobi, the treasury’s wages director. Sources said Yacobi insisted on the milestone after the government’s bitter experience of the failed reform of the ports.

Management and Costs: IEC’s powerful works committee agreed it would no longer have a veto over new hires or firings, although management will have to get union approval to fire an employee on the grounds of “inappropriateness to the job.”

On the other hand, the utility’s management will have much ore power to move employees from job to another. Some 100 to 150 middle managers will be removed from collective bargaining agreements and put on personal contracts.

Costs

Sources estimated Wednesday that the costs of severance pay, bonuses and enhanced pensions would reach 5 billion shekels.

That is more than 3.5 billion to 4 billion shekels the treasury had hoped for, but officials insisted that the savings from reducing IEC’s payroll and selling assets would cover the costs.

In addition to selling the power stations, IEC is also committed to selling valuable properties it owns in central Israel.

That said, the incomes from assets sales will come for the most part five or eight years from now while the payouts to workers will come earlier.

Officials insisted Wedneday that consumers will not have to help pay for the reform, but as Kahlon hinted they may not see benefits in the foreseeable future.

“Consumers will fund the reforms of electricity rates, which could be coming down by a few agorot,” said one source close to the talks, who asked not to be named.