Israel to Launch New Effort at Electric-power Reform

Seventeen years after the domestic power market was first opened to competition and the Israel Electric Corporation was ordered to restructure, the government and labor unions are due to declare another effort overhaul the industry.

Energy and Water Minister Silvan Shalom and Ofer Eini, chairman of the Histadrut labor federation, will announce they are beginning negotiations on reforming the state-owned IEC. Uri Yogev, the former treasury budget director, will join the planned news conference, but Finance Minister Yair Lapid will be absent.

The reason for Lapid's no-show is that the finance and energy ministries have been at odds over the last several days on how the interministerial steering committee will be handling the talks, how government policy is structured, and whether the Energy or Finance Ministry will lead it.

The team will have between eight and 10 members, including officials from the treasury, Energy Ministry, Electricity Authority, Government Companies Authority and Prime Minister's Office.

The projected talks are the latest effort in one of the most intractable problems facing policy makers: how to break what may be the most powerful and richest monopoly in the country. In 1997, the effort started with a law paving the way for private-sector competition to the IEC. Seven ears later an interministerial committee proposed splitting the utility into separate generating, transmission and distribution businesses, but that effort failed and in 2007 it was proposed making the IEC into a holding company. That, too, led nowhere.

The Finance Ministry fears the committee - which will have wide-ranging authority, not only over the negotiations with the Histadrut and the IEC but over the fate of the emerging private electric power sector - will diminish its historic control over government relations with the IEC. However, Lapid's office denied there were any tensions over the interministerial committee and said his absence was connected with deliberations on the state budget.

More than that, executives in the private power industry have expressed concern over the last several days that they are being excluded from the talks. They fear that without their presence, the IEC and Histadrut uill seek to preserve as much as its electric-power monopoly as possible.

No management issue

Shalom himself did little to deflate such concerns when he told the Knesset Finance Committee last week that he sees that the IEC's financial problems are due to regulation and not to poor management.

"The IEC has a triple-A credit rating and now it has debt of NIS 70 billion and a rating of BB-plus. This isn't due to the deteriorating quality of management," he said. "We need to undertake a systematic examination."

Adding to the concerns of private providers is that fact that Yogev has served over the past two years as a consultant to the IEC, a relationship that was subject to criticism in a state comptroller's report. Yogev was retained without a competitive tender to provide strategic advice on issues like restructuring the company and government relations.

One way or another, the formation of the steering committee is likely to usher in a process that is both transparent and fundamental, in contrast to last year's unofficial and controversial effort to bring about a partial reform of the industry. That plan, disclosed by TheMarker, had called for the IEC to retain its monopoly while paying billions of shekels to employees in exchange for concessions, to be paid for with higher electricity rates.

Under that proposal, the IEC would not have been broken up or privatized. The state-owned utility would no longer have managed the power grid but would have retained control over it, meaning it would have the authority to decide which rival power companies can be connected to the grid and when.

In addition, the IEC would have been able to build new power stations, regulation would have been weakened and the government would have erased some NIS 6.5 billion in debt. Pension allocations would have been paid for by consumers with higher tariffs and excessive salaries will be overlooked.

In exchange for these concessions by the government, the union would have to agree to some 2,000 IEC employees being sent home under an early-retirement program. But they would be given NIS 3.5 billion in severance benefits. Those who remain would have received a NIS 3 billion "reform grant" by enlarging the portion of their salaries eligible for pension set-asides.

According to a treasury estimate, these terms will cost about NIS 10 billion, which will be financed by not dropping electrical rates in the future as they should be, due to the lower cost of the natural gas the IEC is using to fuel its power plants.

Right now it is unclear where either Shalom or Lapid stand on the issue of electric reforms. The IEC has been pressuring the two in recent weeks to adopt last year's reform framework.