After Eight Years, High Court Clears the Way for Class Action Against Israel Electric Corporation

Justices rule class actions against government companies are permissible, so badly paved roads are now also actionable

IEC and union officials marking a 2013 reform plan
Ofer Vaknin

Can Israelis sue for lower power or water rates if they can prove the utility pays inflated wages? Can citizens seek compensation for corruption at state-owned ports or for badly paved roads?

After years of legal wrangling, the High Court of Justice said over the weekend the answer is yes. The justices, sitting as the Court for Civilian Appeals, cleared the way for most facets of a class action suit of as much as 11 billion shekels ($3.1 billion) against Israel Electric Corp. that was first filed in 2009.

The suit asserts that IEC paid illegal wage supplements to its employees, which boosted its costs. Hiding the payments from regulators, the state-owned utility was able to pass on the costs to consumer in the form of higher power rates.

A panel of judges, headed by Elyakim Rubinstein, not only rejected the arguments put forth by IEC against the suit but also the stance taken by Yehuda Weinstein, the former attorney general, who contended the IEC was immune from such suits.

Their claim was the electricity rates aren’t set by IEC but by an independent government body. In any case, they argued, a new labor agreement retroactively approved the illegal payments and the Finance Ministry has given its backing to it.

But the court said none of the factors should prevent IEC customers from getting compensation. On the other hand, the court did accept IEC’s argument disallowing suits because of inflated debt, with the jsutices ruling that it was impossible to say the higher debt resulted in higher electricity rates for consumers.

As a result, the court cleared the way for a suit that seeks between 3.5 billion and 5 billion shekels in compensation, as against the 9.5 billion to 11 billion originally sought. The final amount will be decided by the Tel Aviv District Court, where the suit now begins.

As of now, the government has no mechanism for compensating IEC customers if the suit is successful. In the meantime, however, the utility does have to pay the plaintiffs 400,000 shekels in court costs

The lawsuit is in fact two that were filed in 2009 – one by Gilad Markman and Sharon Omasi, which sought compensation for inflated costs, and a second one by Michael Bach, which sought the same for inflated debt after IEC revised its figures and suddenly erased 8.9 billion shekels in obligations.

The first suit was based on correspondence between the treasury and IEC that provided evidence of unlawful pay raises, for instance by granting promotions improperly and including overtime hours into pensionable pay.

The second suit was based on inflated pension obligations, which grew 70% to 23 billion shekels in the years 2004-09 on the basis of faulty actuarial data. When the Israel Securities Authority ordered the amount to be reduced by 6 billion shekels, IEC was supposed to return 1.9 billion to the public, but never did.

In response, IEC said, “We are studying the significance if the decision and are considering asking for another hearing.”