That 15% Cut in Electricity Rates? Don’t Count on It

Israel Electric is prepared to do anything but cut its inflated costs.

Itzik Ben Malchi

As things stand now, electricity rates are due to go down 15% next year, good news for consumers, whose household bills will fall by hundreds of shekels, and for industry, which will enjoy savings collectively of some 500 million shekels ($137 million).

But the state-owned Israel Electric Corporation isn’t going to be one of the beneficiaries. Its revenues will drop by 15%, an amount equal to about 4 billion shekels in income in one fell swoop.

The utility doesn’t necessarily need those extra billions: It was allowed to raise electricity rates by close to a third in 2011 when Israel suddenly lost its supply of cheap Egyptian natural gas, and to replace it with costly imported fuel.

But that problem has long since passed, with Israeli natural gas coming on line. Now Israeli households and industry are supposed to begin enjoying the benefits of low-cost gas.

One reason rates aren’t going down the same degree they went up is in order to subsidize the cost of renewable energy, mainly from solar. Another is to help private power companies that have started to compete with the IEC monopoly. The third is that Israeli gas is more expensive imported Egyptian gas.

When Israeli energy companies, mainly Delek Group and Noble Energy, were competing with Egyptian imports the price was in the range of $3-4 per million British thermal units. But without it, the price is $5.6. With energy costs accounting for a quarter of IEC’s total, that 35% increase is a significant cost increase.

IEC hasn’t built any new power stations in the past four years. The law bars it in order to let private producers capture some of the market. Together they have raised 10 billion shekels to build power plants, saving IEC the cost and enabling it to rein in its 70 billion-shekel debt.

But IEC isn’t acting like a company whose growth years are behind it and is carrying a heavy debt load. Instead of selling off assets, reducing costs and cutting payroll, it still wants to keep power rates high so it can accumulate cash reserves.

The utility’s attitude is that if it can wring a high electricity tariff out of regulators, it can go to the financial markets and borrow, knowing it has the backing of the government. Thus, since 1996, rates have been used to put 23 billion shekels into employee pensions, even when the company suffered a severe financial crisis and required state guarantees to borrow 9 billion shekels. Much of that money went into a secret account to fund dubious benefits to workers and to equally questionable pay raises.

Thus, when January comes around, the 15% rate cut might end up being accompanied by a 5% rate hike. The public would still enjoy a cut – just one-third less than it was due.

But IEC can’t count on the public, the media and activists to take such a thing lying down. So, IEC is counting on the red herring of electricity-sector reform.

A government committee headed by Ori Yogev is supposed to piece together such an overhaul, but Yogev himself has been a paid consultant of IEC in the past and his panel doesn’t contain any “problematic” members. IEC executives have access to the committee while private producers have despaired of any influence at all. In fact, they are secretly negotiating with IEC unions.

The result wasn’t reform but a plan to rescue an ailing IEC. Only last-minute intervention prevented the worst of the program – a 4 billion-shekel payout to workers in exchange for 2,500 layoffs and efficiency measures. The unions rejected it and so the reform is dead for now.

Now IEC’s CEO, Eli Glickman, is trying another strategy – fanning the flames of a debt crisis. He has begun warning that IEC’s credit rating will be downgraded, which will mean the utility’s giant debt will fall onto the government’s shoulders. Power will be cut to the Palestinians, who in any case owe it hundreds of millions of shekels.

Glickman appeared in the Haifa Labor Court two weeks ago to defend the workers’ committee demand to strike. The reason? Competition from private power companies are hurting IEC. It will have to cut jobs and close inefficient plants.

If the government isn’t willing to pay the 4 billion shekels as the price of reform, the alternative is to trim that 15% tariff cut. If not, the workers committee will simply refuse to connect the private power stations to the national grid and brownouts will ensue.