“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.
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
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
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
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
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
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
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
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