Electricity Reform Is Short-circuited

Government retreats from the big changes it unveiled three months ago, but will still make huge payouts to Israel Electric Corp. employees.

Ofer Vaknin

It took only three months for the recommendations for major changes in Israel’s electricity sector to be watered down even more — and for them to be replaced by another framework, the fifth time in recent years.

TheMarker has learned that during secret negotiations between the Government Companies Authority and the heads of the Israel Electric Corporation’s union, the two sides agreed that the government would give up on the proposed plan to lay off some 2,000 workers, a move that was intended to save billions of shekels in salary costs for the financially troubled utility.

The planned layoffs will be replaced partially by eliminating the job titles of employees who retire over the next eight years.

In practice, this will make the reform plans even more toothless and the structural changes at the IEC quite minor. The generous package of benefits promised to IEC employees who left the company will be adjusted, but not canceled. Instead, it will include an across-the-board pension benefit for all employees that will cost the government-owned company between 4 billion and 5 billion shekels ($1.2 billion and $1.5 billion).

While the changes will probably draw criticism from the public, the government has basically agreed to pay IEC employees unprecedented compensation, even though they are not entitled to any compensation at all, since they will continue to work at the same jobs without any changes in their conditions.

The GCA and the union agreed to other changes that cover such issues as the relationship between the union and management, as well as limiting the number of senior executives who are covered by the collective bargaining agreement. In return, the Yogev Committee, which is behind the proposed reforms in the IEC, will most likely provide it with further concessions that will make it more difficult for the private power producers competing with the IEC to operate.

The report of the Yogev Committee, headed by GCA Director Uri Yogev, was issued three months ago over objections from the union and the Histadrut labor federation. The union opposed four major items of the reforms: Selling a 15% to 20% stake in the utility on the stock exchange; government supervision of and enforcement against excessive salaries and benefits; ending the privilege of free electricity for employees; and IEC’s spinning off its Eshkol power plant in Ashdod.

Treasury not yet 
on board

The watered-down reforms are now likely to receive the backing of both the union and IEC management, but the position of the Finance Ministry’s budgets and wages divisions on the matter is still unclear.

By winning the consent of IEC employees, the steep 6.5 billion to 7.5 billion-shekel price tag of the original proposal will be much smaller. But the benefits to the broader economy will be much smaller, IEC’s monopoly status will be reinforced and IEC employees will get benefits worth billions of shekels. Moreover, the benefits will be paid to employees immediately while the company’s side of the bargain will be put into place over many years, perhaps never.

IEC will no longer be required to cut 15% of its payroll immediately as originally planned, nor need it put workers in early retirement. Instead the utility will downsize through natural attrition, which means the manpower cuts will take as long as 10 years to complete, instead of the three to five years in the original plan. Natural attrition will reduce the payroll by only 1,300 permanent positions, 400 less than envisaged in the original reforms. In addition, hundreds of temporary workers will be laid off.

Part of the reforms are supposed to include ending union control of management decisions such as hiring and firing, as well as in transferring staff from one job to another inside the company. But the GCA has so far reached an agreement with unions on only a few of these questions, with the government retreating on a number of issues.

In addition, IEC was supposed to cut 15% of its managerial staff within five years and not hire new managers for a decade, but this plan, too, will be watered down.

A decade ago senior IEC executives admitted they had at least 2,000 workers more than needed, at an estimated annual cost of some 1 billion shekels. Thus, in 2008 the utility said it would impose its own efficiency program entailing 1,500 to 2,000 layoffs. That didn’t happen. Instead, IEC added almost 1,000 new jobs since then, so that by the end of last year it employed a record 13,200 people.

In addition to the higher pensions promised workers, it is still not clear whether the union will also demand higher severance pay, along with a bonus for all employees for agreeing to the changes.

As for free electricity for employees, which both current and retired employees enjoy, the government is proposing to replace this with a fixed payment of some 800 to 900 shekels a month after taxes. This will cost the company some 20,000 shekels a year per employee and include pension calculations, further raising employee’s pension payouts and the company’s costs.

The free-electricity benefit would be based on the assumption that each employee’s household uses 10,000 kilowatt hours of electricity annually, which is 25% more than the national average.

In fact, the average IEC employee now uses 14,000 kwh a year of free electricity, or 175% of the national average, although they are entitled to up to 18,000 kwh. IEC pays the taxes imposed on this fringe benefit at a cost of some 260 million shekels a year.