Israel Electric’s Latest Tactic for Short-circuiting Competition

The state-owned utility wants private producers to contribute inflated amounts to help it cover ‘national’ costs such as security

While the public is waiting for the Yogev committee to present its report at the end of this week on structural reforms in the electricity sector, the companies that generate electricity are actually waiting for the Public Utility Authority to announce its own dramatic decision.

The Ministry of Energy and Water Resources’ Electricity Authority, under pressure from the government, is debating a “levy” on private power companies when they sell their electricity to private customers and start competing with the state-owned Israel Electric Corporation.

This charge, meant to cover various costs on a national level, at present falls solely on IEC, which is still a monopoly in producing, transporting and distributing electricity in Israel. The levy would cover items such as providing backup generation capacity in case of a private plant breaking down, subsidizing alternative and renewable electric power resources (costs that have fallen on the IEC until now), security expenses, environmental costs and subsidized electricity for the poor and others.

Under the proposal, the levy would now also be taken from the rates paid by customers to the private electricity producer, and according to the IEC’s calculations, would chop 20% to 25% off the private producers’ revenues.

The government is basically telling the new private power companies that if the industry is entering a new era of competition, then they too must share these “national” costs. Since the private producers could contract a plant at lower costs than the IEC they could offer large customers electricity at a 7% to 10% discount over IEC rates, and still make a tidy profit. Now the state is forcing them to participate on these other costs, which are necessary to keep the entire electricity system functioning.

The private producers are not required to provide power all over the country, as is IEC; they can build a single large facility wherever they choose and skim off the best, large customers, without being required to provide electricity to all Israelis.

Sharing the burden

Basically, what the government is now doing is coming to the private electricity producers and reminding them that the overall electricity business is much more complicated than just producing the electricity and selling it to a customer; and for this complexity both they and their customers must participate − and not just push their costs off onto IEC and the two million electricity consumers in Israel who did not have the option of signing up with a private and cheaper electricity provider.

All these seems quite clear − and legitimate. Charging for the overall costs of the electricity network is logical, and is common in other competitive electricity industries around the world. The owners of the private electricity initiatives were well aware of these demands from the beginning, and most agreed to them.

But the problem is not in the levying of these charges, but in how to calculate them. IEC is being accused − under the auspices of various government ministries and bodies that have given in to the utility’s intense lobbying − of doing everything possible to inflate the calculations of these costs and push them onto the relatively narrow shoulders of its private competitors, possibly with the aim of putting them out of business.

IEC hired the services of the financial consulting firm TASC to calculate its version of the so-called “system costs” it wants to share with the private producers, which it presented to ministries and the Electricity Authority. It includes a number of sections with complex and impressive headlines such as “energy costs stemming from suboptimal operations due to a lack of certainty of demand,” “congestion in the transportation system,” “financing the working capital because of exposure to demand risks and other risks,” and “revolving reserve.” Every item had a price tag for 2013.

Estimates are that IEC calculated these costs at over 4 billion shekels a year, on which private power producers are supposed to pay their relative share. That would be about 10% as of today, or some 400 million shekels a year.

The private producers say the true figure is closer to 1 billion shekels a year − a difference that is critical to them.

Industry sources estimate the Electricity Authority is considering figures approximately in the middle of this range. Meanwhile, the private producers are also threatening to petition the High Court of Justice over the matter.

IEC, which is very busy right now fighting for both its financial future and its monopolistic standing, discovered a wonderful opportunity just lying at its doorstep that could kill three birds with one stone: improving its balance sheet, painting itself as protecting the public from higher electricity rates and eliminating its rivals.

Allocating these system-wide costs to the private producers would lower the public’s electricity rates by a relatively small 1% or less, but would raise the rates for the private producers’ customers by much more. Many of them might just choose to revert to IEC.

Rounding error

For IEC these amounts are a rounding error − they make up between 0.4% to 1.5% of its annual revenues − but for their new competitors reducing the amounts they receive by just 0.5% could be a death blow to their profitability and financial stability.

Estimates are that IEC is asking the Electricity Authority to charge the private producers some 7 to 8.5 agorot per kilowatt hour for these costs, while the private producers are talking about 1 to 2 agorot. Industry sources estimate the Electricity Authority is considering numbers of about 3 to 5 agorot.

The Electricity Authority has spent the past few months facing the challenge of how to calculate these nationwide costs, while carefully trying maneuver between the raindrops falling on all sides. They need to not short-change IEC on one hand, while not killing off the private initiatives on the other. But a number of political variables have been added recently to the minefield of this professional challenge.

The main political problem is that of IEC itself. The company’s union, for example, has prevented it from presenting the Electricity Authority with the true figures on some of these costs, so the authority is unable to accurately determine the actual costs involved − and so IEC can inflate the amounts.

In addition, IEC is known for its creative accounting talents and its ability to allocate costs between its various parts and businesses, such as electricity generation, transportation and distribution, which are not separated, and these costs can be shunted back and forth as necessary between the different divisions and segments. This allows IEC to exploit the cross-subsidies in its operations − and it is unlikely anyone outside the IEC can track the true numbers down.

For example, how is it possible to calculate the costs of establishing a new company if every year the IEC amortizes 2 billion shekels of its operating expenses for fixed assets? How is it possible to have competitors participate in covering IEC’s capital costs, if IEC is backed by state guarantees for raising funds? And how is it at all possible to compare the costs recorded by a state-owned corporation that works on a cost-plus basis, and is not required to pay dividends to its owners, to those of a privately funded initiative?

Enlisting aid

The Electricity Authority held public hearings on the matter and the private producers were allowed to present their case, too. But instead of helping the authority to solve the complex accounting dilemma, IEC has enlisted two new supporters: The head of the Government Companies Authority Uri Yogev, who chairs the committee proposing the reforms for the electricity sector − and seems more and more to be a committee “to save IEC” − and Finance Ministry Accountant General Michal Abadi-Boiangiu. She is also a member of the Yogev committee,but her main concern is the huge growth in the debts of IEC than with the competition in the electricity industry.

Yogev sees the passing on of the costs to the private producers as a way of paying for the reforms in the IEC while keeping consumers’ electricity rates almost unchanged. Abadi-Boiangiu sees the issue as an opportunity to improve the IEC’s cash flow, even at the price of sacrificing competition.

The best way to describe visually what the Electricity Authority is being put through is that of a acrobat (the authority) walking on a tightwire (the future of the electricity sector) while the circus manager (Yogev) is pushing him harder and harder to move faster and faster, and the ringmaster (IEC) is making sure to hide the acrobat’s path with thick smoke so as to give the acrobat only two options: To follow what those surrounding him are telling him, or to crash.

Beny Mor