State comptroller slams government authorities, IEC for failure to reform electricity sector

Shapira recommends that the energy and finance ministers urgently examine alternatives for operation the country's electricity sector.

By
October 28, 2015 16:03
Electric poles

Electric poles. (photo credit: REUTERS)

 
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As tens of thousands of Israelis coped with the aftermath of mass power outages caused by a storm earlier this week, State Comptroller Joseph Shapira issued an unrelated report on the failure to reform a malfunctioning electricity sector.

“Israel’s electricity sector is a centralized market that is largely operated by a monopoly – the Israel Electric Corporation – that produces most of the electricity, conducting and distributing electricity in an exclusive manner to consumers around the country,” Shapira wrote. “For 18 years, the Israeli government has not succeeded to implement the objectives of the Electricity Sector Law and execute structural change in the electricity sector and in the IEC, and generate competition in this area.”

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In a comprehensive audit, the state comptroller investigated deficiencies in a number of areas, including electricity reform and restructuring, IEC tariff determination, workforce efficiency and employee operations. The audit occurred primarily from July 2012 to April 2014, with updates through May 2015, and extending as far back as 2007. Among the report’s subjects were the IEC, the Public Utility Authority, the National Infrastructure, Energy and Water Ministry, the Finance Ministry, the Government Companies Authority.

Shapira discussed how the Electricity Sector Law was established in 1996, with the purpose of regulating the market by creating conditions for competition and minimizing costs. Central to the law was an overhaul of the sector, primarily involving splitting the IEC’s activities and transferring some of these responsibilities to separate companies, as well as determining that the PUA would be the sole regulator responsible for determining electricity tariffs.

In 2002, the government decided that independent producers would be limited to generating 20 percent of the country’s electricity, the state comptroller added.

Aiming to reform the electricity sector, in July 2013 then-energy minister Silvan Shalom and then-finance minister Yair Lapid appointed a steering committee tasked with submitting recommendations by the end of that year, the report explained. In October of that year, a team of government and IEC management representatives began negotiations related to the firm’s workers.

The steering committee published its recommendations in March 2014. Later that year negotiations with the company’s Workers’ Union and the Histadrut labor federation were deadlocked – until they agreed on renewing negotiations in November. But in March 2015, the Government Companies Authority informed the State Comptroller’s Office that the work of the steering committee had ended, Shapira wrote.

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As far as the IEC’s finances are concerned, the company’s debts by the end of December 2014 reached about NIS 71 billion, constituting about 10.7% of the national debt. At the time, production capacity stood at about 13,617 MW, background information in the report explained. The production capacity of private power producers, which began entering the market in the second half of 2013 and are selling electricity to the IEC via the national transmission grid, has grown to 2,046 MW.

The financial standing of the IEC has been significantly affected by both the tariffs set by the PUA and by the company’s failure to implement three efficiency programs approved by its board of directors in the years 2007 to 2012, the state comptroller said.

As of May 2015 – when the state comptroller completed the latest audit of the sector – the IEC was carrying out the majority of activities in the electricity market, as a monopoly, Shapira explained.

• The state comptroller identified seven main deficiencies in the electricity sector – the first being the overall failure to realize an sector reform. For 18 years, since the enactment of the Electricity Sector Law, the Energy Ministry, Finance Ministry and Government Companies Authority have failed to commit to structural changes, Shapira stressed.

• A second failure identified by the report was the negligence of the former energy and finance minister regarding the inclusion of balancing parties in the 2013 steering committee, which was supposed to bring about necessary reforms. The team lacked members from independent agencies capable of balancing the opinions of those in the ministries themselves and the IEC, such as representatives from the PUA, Shapira wrote.

• Looking at the results of the steering committee’s work, the state comptroller found that the team’s recommendations left intact most of the IEC’s electricity sector activities, without examining the company’s assets and debts or improving its financial strength, as well as failing to rehabilitate its monopolistic structure.

• A fourth deficiency in the sector, according Shapira, is the lack of market value calculations regarding a transition from dependence on the IEC to a competitive arena. The state comptroller slammed government bodies for failing to gauge the damages caused to the economy as a result of the continued reliance on the IEC as well as the lack of implementation of restructuring and efficiency programs. The State Comptroller’s Office estimated that these damages amounted to between NIS 9.1b. to NIS 12.4b. for the years 2008 to 2013.

• Looking into a fifth deficiency, namely the IEC’s failure to streamline labor costs also from 2008 to 2013, the report found that the company’s management and board of directors were already aware before 2008 of the surplus of some 1,700-2,500 workers in the company. By May 2008, the surplus was estimated to cost some NIS 700m. to NIS 1b. annually. The employee surplus from 2008 to 2013 cost about NIS 4.0b. to NIS 6b., the state comptroller wrote, citing IEC estimates.

Although the board of directors approved three efficiency programs from December 2007 to December 2012, none were implemented, Shapira said. The IEC attributed the lack of implementation to the Government Companies Authority’s refusal to approve the programs, as well as to a lack of agreement with relevant parties on employment and retirement conditions, the report explained.

• A sixth deficiency pertains to the PUA’s failure to update base tariffs for IEC transmission and distribution since originally setting such rates in July 2002, the state comptroller said. This omission has influenced the assets of the IEC and its financial standing, Shapira wrote.

• Identifying a seventh and final failing, the state comptroller said the IEC has not instituted suitable supervisory mechanisms of work flow efficiency. However, from 2007 to 2013, the management and board of directors did adequately monitor the company’s progress in achieving efficiency targets, the report said.

Moving forward, Shapira recommended that the energy and finance ministers urgently examine alternatives for operating the country’s electricity sector. At the same time, he called upon IEC board of directors and managers, as well as relevant government officials, to take all necessary steps required to increase cooperation among them – ultimately generating greater efficiency, reducing IEC expenses and improving the company’s financial status.

The state comptroller tasked the PUA with updating its base tariff system for the IEC.

Should the energy and finance ministers decide to reexamine the independent status of the authority, Shapira called upon the politicians to act carefully and in accordance with the law, ensuring that electricity rates are determined by an independent professional.

“The government bodies, including the PUA, must implement a comprehensive examination of all the reasons for the financial situation of the IEC, in order to decide on steps that will realize and ensure its survival as an essential service provider,” Shapira said.

In response to the report, the Energy Ministry said that it “will continue to work vigorously to advance the energy sector for the benefit of the country and its citizens, will review the audit’s findings seriously and will work to implement all actions toward promoting the subject.” The Energy Ministry’s reaction also referred to the weather conditions that led to mass power outages over the past few days, noting that National Infrastructure, Energy and Water Minister Yuval Steinitz has set up an investigative committee on the issue.

The committee “will examine the conduct prior to the event from all aspects and generate lessons for the future while addressing the state comptroller’s report, and will submit its conclusions as soon as possible,” the Energy Ministry said.

Also responding to the report, the PUA stressed the importance of maintaining its independence as a regulator, in order to remain resilient against “the monopolistic pressures of the IEC.” The PUA said it has been warning about the inefficiency in the company for years, and complained of the authority’s lack of proper inclusion in the government steering committee for reform.

Regarding the PUA’s failure to update base tariffs for the IEC, the PUA statement said that in the past two years, the authority added a collective sum of about NIS 1.4b.

to the tariff revenues, with the idea that the IEC would invest in electricity infrastructure.

This money, however, were generally not used by the company to invest in infrastructure, according to the PUA. As a result, the PUA decided in September 2015 to establish a supervised account with monthly deposits, from which the IEC could withdraw only after verifying that the money would be used for infrastructure, the statement added.

As far as the IEC is concerned, the company said that it “welcomes the state comptroller’s determination that it is impossible to continue without a comprehensive reform of the electricity sector.”

“The company has been warning about and has been demanding the advancement of the reform for years, in order to enable the handling of obsolete infrastructure and make the workforce significantly more efficient,” the IEC said.

“The company is committed to investing in electricity infrastructure, and unfortunately, this investment was delayed by the PUA, which prevented it in such a way that merits a special examination, and the state comptroller did well when he exposed the incompetence of the authority,” the IEC said.

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