The Price of 'Privatization Lite'

Instead of raising funds to develop and maintain the Israel Electricity Corp, the state prefers to get involved in an adventure that is liable to endanger the reliability of electricity supply and cause it to be be out of reach of many Israelis.

Instituting "structural changes" in the electricity industry is considered the flagship of the privatization ideology. If the government would only be allowed to dismantle the anachronistic monopoly of the Israel Electric Corporation (IEC) and sell parts of it to investors, the argument goes, such an achievement could be added to the privatization revolutions in the communication and transportation industries. Then we will all be able to have a proper, flourishing economy.

And here, on September 12 the government decided to allow the electricity industry to undergo a sort of "privatization lite," with the option for more extensive privatization in the future. The government has determined, in a section of the Economic Arrangements Law called "Making public service efficient and improving services for citizens," that the IEC will be split into at least four subsidiaries that will generate electricity, and into three to five others that will distribute it to consumers. By 2012, 49 percent of the company is slated to be sold to private investors. The price of electricity will gradually stop being regulated by the public authority that currently determines it.

Dismantling the monopoly, promises the government, will generate competition. And competition, we are always told, reduces the price for the consumer. To the credit of the Finance Ministry, it did not promise, in the explanation given for the government decision, that competition would actually reduce the price of electricity. After all, the treasury knows the truth: Even the experts' report it asked for recommends that the price of electricity be raised by 12 percent.

The New York Times recently published a series of articles marking a decade since the privatization of the electric companies in nearly half the states in the United States. The headline of the first article in the series, which ran on the paper's front page last week, was: "Competitive era fails to shrink electric bills." The paper found that electricity bills did decrease "modestly" when Washington opened that market to competition, but said that this was because the states imposed cuts, freezes and price caps at the request of consumer groups, in an effort to protect people from higher prices.

By next year, the last of the rate protections will have expired, the paper reported. It said a draft report to Congress from the Federal Energy Regulatory Commission and other federal agencies warns that "customers may experience rate shock" due to an expected rise in prices, and that California and five other states have frozen or postponed the transition to the competitive approach due to concern over this. The newspaper found that electricity rates are expected to rise by 72 percent in Baltimore, Maryland, and up to 55 percent in Illinois, and that in Connecticut they already rose by up to 27 percent last year and are expected to go up by as much as 50 percent more in January. In New Jersey, it said, rates increased up to 13 percent this year, and are set to mount much higher.

When the American electricity sector opened up to private investors in 1996, free-market economists and the Clinton administration applauded the move, and the industry and consumers were told they would see billions of dollars a year as a result, the Times reported.

Although the public electric companies were split into energy producers and energy suppliers, however, the paper noted that "a truly competitive market has never developed," and in most areas the number of power producers is small. It said some utilities buy more expensive electricity than needed, and in other cases, investors have made a large profit on reselling power plants they just bought or else purchased power plants from the utilities at bargain prices, then sold the electricity back for much more money. In addition, the article in the Times said, some companies that produce electricity withhold it or limit production.

Even the Cato Institute, which favors as little regulation as possible, has recommended "total abandonment of restructuring" in the electric industry, the Times reported.

You don't need to be an expert to understand that a similar fate awaits the Israeli electricity revolution. The IEC already has a hard time supplying enough electricity to meet the demand. According to experts, at least one coal-based power plant should be built soon, at a cost of $1.5 billion. One can presume that entrepreneurs prepared to invest in this would want a rapid return on their investment and that investors will not be standing in line to build a lot of additional power plants.

Although the demand for electricity has grown, the Israeli market is small, and unlike in the United States, it's not certain that an investor would be able to sell electricity to the neighboring countries in the future. Like the United States, though, there will also be room here for producers to maneuver: They could produce electricity at will and reduce production at will to raise the price. The result will be more expensive electricity.

Instead of raising the necessary funds to develop and maintain the IEC, which supplies electricity at among the lowest rates in the Western world, the state prefers to get involved in an adventure that is liable not only to endanger the reliability of the supply of electricity but also cause such a basic utility to be out of reach of many Israelis. There are already hundreds of thousands households that have a tough time paying their electric bills. True, all the Israelis who love getting angry at the good salaries of the IEC workers will be satisfied if the company is privatized and the salaries are cut, but the consumers won't be the ones who benefit from it. If anyone benefits, it will only be the entrepreneurs.