Jerusalem Report

Electric Power Failure

Government's ineptitude in imposing reforms on the Israeli Electric Corporation might lead to a potentially serious electricity shortage.

RUNNING LOW: Israelis stand on the beach in front
Photo by: Amir Cohen
“LET THERE BE LIGHT!” Every time we flip a switch, we implicitly command energy to flow to light, heat, cool and power our world.  And we expect an instant response. Only when the lights go out do we stop taking the blessing of electricity for granted

In Japan, there is new appreciation of electric power. With over a quarter of Japan’s electric capacity gone, in the wake of the March 11 earthquake and tsunami, the economic damage resulting from the shortage of electricity will prove more costly than the property damage from the tsunami itself. On May 9, the Hamaoka Nuclear Power Plant was shut down, not because of damage but because it is old and on an earthquake-prone swath of coast. As hot summer weather approaches, the Japanese face rolling threehour blackouts in Tokyo and elsewhere.  Toyota and other manufacturers are shifting production to China. It takes years to construct power plants, so the crisis will not be brief

Israel, too, faces a potentially serious shortage of electricity. Peak demand is about 11,000 megawatts and maximum capacity is about 12,000 megawatts. This 8 percent gap between demand and maximum supply is dangerously slim. Power generators are routinely taken out of service for maintenance, there are accidents and always there is the potential of damage from war. In the United States, for example, there is 22 percent excess capacity, up from 14 percent in 1998. The US could lose one of every five power plants and still meet its electricity needs.

The root cause of the looming electricity shortage is the inability of the political system to impose desperately-needed reforms on the management and workers of the Israel Electric Corporation (IEC) and on those who regulate them, even though it is a wholly government-owned monopoly, and despite almost continued efforts for two decades.  IEC’s shaky finances will make it difficult and expensive to borrow the funds urgently needed to build new electricity plants, estimated at NIS 9.2 billion ($2.7 b.) between 2011-13. It is high time that those who bring electric power to the people accept the power of the people to reform and modernize antiquated labor and management practices in IEC.

Let’s start with the money. I downloaded and read IEC’s 2010 Annual Report – 616 mind-numbing pages, including a 423-page Board of Directors report. Despite IEC’s claim to have adopted international financial accounting standards, its financial statements are peppered with auditors’ footnotes and disclaimers.  According to the financial daily “The Marker,” the IEC management, directors and auditors (Deloitte Brightman Almagor Zohar) admit there may be “material misstatements in the annual or quarterly financial reports."

This is unacceptable for a company with $5 b. in annual revenues. In December 2009, IEC admitted that the sum of NIS 8.8 b. it provisioned for employee pensions was excessive.  This made its net income lower and meant that the interest on IEC’s debentures was set higher than it needed to be, at a high 9.83 percent. In 2010, IEC had barely NIS 1 m. in net profit, compared with NIS 1.4 b. in 2009; hence no profits are available for reinvesting in new plants.

In his annual report, State Comptroller Micha Lindenstrauss found that every single IEC worker got an “efficiency bonus,” at a cost of NIS 386 m. in 2009. Some months ago, IEC management admitted it overpaid staff and returned NIS 100 m., a fraction of the total amount overpaid during the past decade.

Compare IEC to, for instance, Con Edison, the US electricity utility that operates in New York and New Jersey. With about 15 percent more workers than IEC, Con Edison generates $15 b. in revenues, three times that of IEC (with electricity priced just slightly higher than Israel), and $1 b. in operating profit.

This brings us, in turn, to the IEC’s 13,000 workers. Some companies deduct too little for their workers’ pensions, as a way of cutting costs and saving cash. I know of no companies that deduct too much. Why did IEC do this? Credit it to the immense power of the IEC workers’ union. This all-powerful union, able and willing to pull the plug on Israel’s power, has frustrated efforts at reform and efficiency for two decades.

Back in 1993, a task force led by Yossi Vardi – formerly director general of the Energy Ministry , later reincarnated as an entrepreneur and venture capitalist – tabled a concise report detailing 25 key reforms in IEC.

The main one: Legislation to remove IEC’ s monopoly status. None of these reforms were implemented, but a new task force led by Technion Prof. Daniel Czamanski was set up in 1994. Czamanski proposed a new structure for the electricity industry , with independent producers.

Today , 17 years later , few or none of these reforms have been substantively implemented either . IEC management has been impotent and IEC workers have militantly opposed reform.

The legendary Yoram Obrakovitch headed the Electricity Workers’ Union for 25 years until his death in 2003. He led a militant two-week strike in 1978 that disrupted electricity nationwide and has ever since kept politicians from controlling IEC workers’ bloated pay . Obrakovitch’ s sumptuous of fice in IEC headquarters was left untouched for years after his death, in tribute.

No wonder. According to the Central Bureau of Statistics, in 2010 wages of electricity and water industry workers were two-and-onehalf times the average wage of Israeli workers.Among other perks, IEC workers get free electricity .

Finally , there is the festering issue of regulation. IEC is regulated by a murky public body known as the Electricity Authority . Its full name is the Public Services Authority – Electricity (PSAE), and it sets the price of electric power . Last August, IEC sought a Supreme Court injunction to force the PSAE to disclose fully how it calculates the price of electricity . In which modern nation does a government-owned company sue a government regulator? There is another unique, weird situation in Israel – while gasoline prices are among the highest in the world and water prices have risen steeply , electricity prices were slashed by an average of 10 percent in February 2010 and again by 0.34 percent last March.

Why? At a price of about 10 cents (NIS 0.35) per kilowatt hour , Israel’ s electricity is already cheaper by far than in Switzerland, for instance (15 cents), Japan (22.8 cents), Portugal (20 cents), Ireland (25 cents), or the US (1 1.5 cents).

Why is ener gy from gasoline super -expensive and ener gy from electricity super -cheap? Chalk it up to the populist Electricity Authority .

Between incompetent regulation, militant IEC workers and impotent IEC management, Israel’ s crucial electricity infrastructure is under long-term threat, unless rapid action is taken.

In modern developed nations, growth of electricity demand outpaces growth of GDP .

In 2010, world electricity generation was 2.5 times its level in 1980 – while world GDP less than doubled in the same period. In order to ensure continued reliable electric power to the people, Israel’ s political system must muster all its courage, confront the tough IEC union and reor ganize its electricity regulation.

Electricity prices should be set at levels that ensure IEC profitability , while IEC should trim its bloated workforce by 20 percent and slash its management overhead.

IEC must reduce its debt burden down to 60 percent of assets, because it is over -leveraged, according to W orld Bank experts who recently visited Israel. IEC must vigorously encourage private electricity producers who generate their own electricity and then supply excess amounts of it to the national grid.

The V ardi-Czamanski reforms must be implemented by government mandate.

In a recent editorial, the daily “Haaretz” warned that “Israel’ s infrastructure is hanging by a thread.”

The editorial itself referred to contaminated jet fuel, which recently delayed flights at Ben-Gurion Airport, Israel’ s aerial gateway . But the “hanging by a thread” metaphor applies equally to electric power .

And “Haaretz’ s” bottom-line recommendation, “replace the attitude of complacency with a culture that fosters preparedness,” must be implemented at once.

If IEC is to continue to bring power to the people, ef fective power to regulate IEC management and workers has to be returned to the people without delay .

• The writer is senior research fellow, S. Neaman Institute,Technion.


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