Electric Company Chairman to Knesset: Pay Up, or Lights Go Out

Israel's problem with electricity isn't just that its price could soar. The supply itself could be threatened if the Israel Electric Corporation isn't allocated more money to buy fuel, the utility's chairman told the Knesset Economics Committee yesterday. Therefore, it should be allowed to raise its rates, he argued.

shapira - Emil Salman - July 12 2011
Emil Salman

The Knesset members were not persuaded.

The Economics Committee was discussing the IEC's proposal to raise electricity rates by 20%. The rate hike doesn't require the committee's approval in theory, but its members have already announced their opposition. The IEC management is adamant that the government company needs the money.

"To produce electricity from diesel fuel, the diesel has to be bought," Yiftah Ron-Tal told the Knesset members. The IEC has only a six-week supply of diesel because of its weak cash flow. It should have bought more already, but it doesn't have the money, he said.

"We need to buy diesel next week," Ron-Tal said. In order to do so, the IEC needs an immediate cash injection. "Otherwise the company won't be able to meet its mission of supplying electricity," he said.

The IEC wants to buy 650,000 tons of diesel by year-end 2011. Of that, 250,000 tons are for July and August alone, hot months when Israelis turn on power-guzzling air conditioners.

NIS 60 billion in debt

The IEC is in horrible financial condition, Ron-Tal said. "Its total liabilities - short-term, medium and long-term - are NIS 60 billion." That means incoming cash is stretched, and "this is a crisis."

The IEC had been relying heavily on natural gas. About 45% of its electricity had been produced from gas, but the supply from Egypt began to stutter in early February, as Hosni Mubarak's regime came under attack and fell. The pipeline to Israel has now been sabotaged three times (not counting one failed attempt ), halting supplies for more than two months in total. Not only has the IEC needed to resort to costlier, dirtier fuels, but when the Egyptian supply did resume, it didn't flow in full.

Starting in 2013, the IEC means to buy gas from Israel's Tamar natural gas field.

The 20% increase advocated by the Public Utilities Authority is calculated as follows: It assumes that the Egyptian gas supply will run at 20% to 30% of capacity, requiring the utility to use other, costlier fuels. That alone adds 9% to the tariff. The Environment Ministry refuses to let it use cheap mazut but only cleaner diesel, which costs more - that adds 7%. Then there is the increase in the price of coal starting this week, which adds 4%.

"The cost of not supplying electricity will be a lot higher than the cost of supplying expensive electricity," Ron-Tal warned the committee. He added that if the Egyptian gas supply continues to run at only 20% in 2012, the IEC will need an extra NIS 5 billion.

The Egyptian gas shortage is a crisis: It forced the company to deviate from its working plan, explained Amnon Shapira, chairman of the Public Utilities Authority. The IEC had based its plan on a certain amount of gas arriving from Egypt, and that gas hasn't come through. To provide Israelis with power this summer, it has to use costlier alternatives - and to help the public, the ministries should each do their part, he urged. For instance, the IEC should be relieved of environmental restrictions, he suggested.

The state needs to find the fine line between minimizing production costs and minimizing particle emissions, Shapira summed up.

No rate hike: Cut tax, say MKs

Meanwhile, the Knesset Economics Committee members firmly opposed the rate hike. Instead, the state should lower its tax on the diesel the IEC needs to buy to replace the Egyptian gas, the MKs said.

"Electricity prices are one of the things we'd fight over," said committee chairman Carmel Shama-Hacohen. "If the treasury wants to tax the extra diesel the company needs to buy, that is a show of greed and obtuseness to households, businesses and manufacturers.

"You have no choice," he said, turning to treasury representatives at the debate. "You have to lower tax on diesel as you did on gasoline."

MK Miri Regev (Likud ) urged that any increase in electricity tariffs be subject to Knesset Economics Committee approval.

MK Yitzhak Vaknin (Shas ) suggested that the IEC be exempt from paying VAT on the extra diesel it needs. But Udi Adiri, a representative of the Finance Ministry, put in his oar, saying that canceling the VAT on diesel wouldn't eliminate the need for a tariff increase entirely. It would halve it, though.

Israeli households pay some of the lowest electricity prices in the world, Adiri said: an average of 15.7 cents per kilowatt hour, compared with 40 cents in Denmark, 27 cents in Ireland, 30 in Italy, 24 in the Netherlands and 22 in Spain. In the U.S., however, it is 12 cents.

Adiri also expressed a Finance Ministry concern that exempting the IEC from tax on diesel would spur other manufacturers to make similar demands.

Diesel costs more here

Meanwhile, a paper written by the Knesset's research division concluded that diesel costs 35% more in Israel than the European average, in terms of purchasing power parity. The study was commissioned by MK Ophir Akunis (Likud ).

In PPP terms, as of June 27, diesel cost 1.56 euros per liter in Israel, compared with 1.48 in Britain, 1.38 in Portugal, 1.03 in Holland, 0.98 in Finland and France, and 0.84 in Denmark, the study found. The European average is 1.11 euros per liter.

About a month ago Akunis tabled a legislative proposal demanding that the government reinstate control over diesel prices. He intends to bring it before the cabinet on Sunday.