Electricity lines 390.
(photo credit: Thinkstock/Imagebank)
The government has just announced that the price of electricity will go up by
another 9 percent, bringing the total hike in electricity tariffs to 25% since
Many reasons have been advanced to explain this price
increase; some even appear economically sensible. For example, it is reasonable
to assume that prices will go up when demand increases, due to say unusually
cold weather, and when supply decreases say as a result of sanctions placed on
However, this well-known market mechanism is hardly relevant in
Israel, simply because there is no real market for electricity.
Israel Electric Corporation operates as a public monopoly and the Public
Utilities Authority-Electricity decides what the price of electricity in the
country will be.
Indeed, the latest electricity price increase has little
connection to the forces of supply and demand. It is more easily explained by
the pathetically bad management of our nation’s energy supply
. This was recently
recognized by Standard & Poor, which downgraded the IEC, signaling to all
that the current financial situation at the IEC is nowhere near sustainable. But
even if the government continued to provide support to the IEC, through wads of
taxpayer money, there would be no light at the end of the tunnel.
simply needs to start balancing its budget so that revenues cover costs. As with
any company under financial stress, three options are available; increase
revenues, decrease expenses, or do a combination of both.
surprisingly, most of the discussion in the media and in political circles
focuses on only one solution – increasing revenues.
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Cutting costs is
perhaps only whispered behind closed doors. No one dares mention that
possibility out loud. So the result is that the Israeli public is once again
called upon to do its civic duty and bail out an unproductive, inefficient and
badly managed public behemoth, directly through an increase in tariffs and
indirectly through taxation.
Of course, since the IEC is a public
monopoly, consumers simply cannot decide to switch to an alternative provider.
The IEC holds the public hostage, meaning the IEC management has no incentive to
become more efficient and reduce expenditures. It is another perfect example of
what economists call “moral hazard.” The IEC is not the one that bears the
consequences of its inefficiency and waste. Why should the IEC try and reduce
their production costs (e.g., the salaries of their relatives working in the
firm) if they are fully insured by the government (i.e., the Israeli public)? In
Israel, the doctrine should probably be called “Too Connected to Fail,” rather
than “Too Big to Fail.”
Instead of asking how much the IEC should raise
tariffs, the question should be, how could we reduce the cost of generating
electricity? One of the main reasons the cost of producing electricity in Israel
is so high is because of huge labor costs deriving from past collective
agreements on wages and pensions.
According to a World Bank study,
salaries at the IEC are among the highest in the world. On average, workers at
the electrical monopoly earn 38% more than employees with similar skills in the
The union is so powerful that government officials are
afraid to confront it. It is much less costly for them to treat the Israeli
public as the fryers, or suckers. Their fear is understandable – the union will
not hesitate to use its most powerful weapon – the strike – to cripple the
country and saddle it with additional huge bills to pay.
The union knows
very well that as far it can keep the IEC a public monopoly, it will be able to
extract unreasonable compensation at the threat of an economic
That’s the reason they so fiercely oppose privatization. Even
more shamefully, the workers’ committee is asking for a payment of NIS 100,000
for each employee in order to agree to only a partial privatization of the
The Electricity Sector Law of 1996 that was supposed to
implement the first steps towards private sector participation and competition
has totally failed. If it had succeeded, Israel would now have a multiple
provider service similar to the one adopted by many OECD countries and each of
us would enjoy a cost effective and competitive market for electricity.
According to the International Energy Agency all the countries that implemented
a privatization of the electrical distribution (also known as multiple
providers) enjoyed a decrease in the final electricity price. In the UK and
Australia, labor productivity increased by 40% to 50%.
This is exactly
what happened in Israel when in 1997 the monopoly of Bezeq was broken and
replaced by a multiple provider scheme. The results speak for themselves: the
real price of international calls fell by 87% and the price of the “domestic
phone basket” by approximately 25% almost immediately after the reform was
It is time that the Israeli public demanded real reform in
the electricity market. The government should stop surrendering to the unions
and should serve the entire civic body, not just the privileged workers at the
IEC. Only through a competitive market for electricity will the 2.5 million
clients of the IEC be able to voice their opinion louder than the 12,000 IEC
workers.The writer is co-founder and director of the Jerusalem Institute
for Market Studies, an economic policy think-tank located in Israel.
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