Electricity Authority Merger Threatens Sector's Credit Ratings

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The Israel Electirc Corporation provides the Palestinians about 7% of its total production via high-voltage electricity lines. Credit: Reuters

A proposed change to the regulatory framework in the electricity sector could effect the credit rating of industry players, TheMarker has learned.

The government is planning on revamping how the electricity sector is regulated through new legislation to be contained in the proposed Economic Arrangements Bill, the supplementary legislation that accompanies the budget. The proposal would deprive the Electricity Authority that currently oversees the electricity sector of its independence, and instead make it subject to the authority of the energy minister, currently Yuval Steinitz. The change would also result in the removal from office of the chairperson of the Electricity Authority.

In a professional opinion it issued Tuesday, the Midroog credit rating agency warned that the reform could have negative repercussions on credit rating assessments of electricity companies, natural gas companies and renewable energy production projects involved in electricity production in Israel. “A shift to an [Electricity] Authority that is not independent and is subject to political pressures could do harm to regulatory certainty and stability and negatively influence certainty of long-term cash flow, something that would lead to direct harm to the rating for the projects and the companies operating in the sector,” Midroog warned.

Noting that billions of shekels have already been raised to finance infrastructure projects in the sector, Midroog added that retroactive changes in regulatory policy would also lead to increased credit risks on existing projects.

Two weeks ago, the cabinet approved the proposed merger of the independent Electricity Authority with the electricity administration at the Energy Ministry, depriving it of the autonomy that it has had since 1996. If passed in the Economic Arrangements Bill, the energy minister would have full authority over the electric utility sector, including the right to delay the implementation of decisions of the Electricity Authority that he disagreed with, although the authority would remain independent in setting electricity rates.

The proposed elimination of an independent electricity regulatory agency also may have international implications in light of current practices among countries of the OECD, the grouping of the world’s developed countries, which Israel joined in 2010, and among oversees financial institutions.

In an interview two weeks ago with TheMarker, the former chairman of the Electricity Authority, Amnon Shapira, noted that in advance of Israel’s joining the OECD, a delegation from the organization visited him. “Really, all the organization’s representatives wanted to know was the degree of independence of [my agency],” he said.

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