| TEL AVIV, July 18
TEL AVIV, July 18 In a TV comedy sketch
well-known among Israelis, a man sits in his living room bundled
in a fur coat with four air conditioners on full blast. A
shivering guest asks if he could turn just one of them off.
"Turn off an air conditioner?" retorts the man who, as an
employee of Israel Electric Corp, would enjoy free electricity.
"Why turn off an air conditioner when I can turn on an electric
Some viewers may have chuckled when the sketch first aired
years ago. But for the majority of Israelis now, facing the
prospect of rolling blackouts in sweltering heat, the
electricity situation is no joke.
Israel Electric Corp (IEC), which is responsible for nearly
every aspect of electricity from running power plants to
connecting households, simply cannot keep up with growing
The state-owned utility just lost natural gas supplies from
neighbouring Egypt and fuel costs are soaring. Reserves are low
and capacity insufficient and the government, under pressure
from massive cost-of-living protests, has limited how much it
can charge the public for electricity consumption.
IEC is also grappling with a huge debt load exacerbated by
generous workforce benefits. Its nearly 13,000 staff enjoy
salaries three times the national average - and that free
Reforms are needed, and fast. But the crackdown the
government has been promising for more than a decade is being
fiercely resisted by the union, and politicians have backed down
from a sweeping plan to split IEC into two companies, one for
power generation and one for distribution.
Unions saw the plan as a first step towards privatising the
company and feared job cuts.
They are now in protracted negotiations over "mini reforms",
while areas around the country's second most populous city Tel
Aviv lost power for hours in the middle of the day last week.
YEARS OF NEGLECT
Since Israel's founding 64 years ago IEC has been the only
player in the electricity sector, but has never received enough
money to cover the expenses of a growing population's demands.
Rates for consumers were kept low by the government which
limited cash injections to the company itself. IEC has now
accrued a whopping $16 billion in debt and is being kept alive
by repeated government-guaranteed bond offerings -- including
2.9 billion shekels ($734 million) raised earlier this month --
which help it pay for fuel but add to its problems.
One source at the company said IEC wanted to issue over $1.3
billion in bonds this month, but the government said it would
only back just over half that amount.
With the debt burden a priority rather than infrastructure
investment, grid capacity lags well behind demand. Energy
Minister Uzi Landau said recently reserves could drop to two or
three percent of total production this summer, a dangerously low
level. Reserve margins typically stand above 20 percent in
The government blames much of the IEC's problems on its
"The high salaries and free electricity have tarnished the
company's image," acknowledged IEC chairman Yiftah Ron-Tal in a
recent briefing with reporters.
But by European standards, household electricity bills
remain low, and the government's own policies on tariffs have
contributed to IEC's fragile financial situation.
According to Eurostat, the EU's statistics database,
Israelis paid on average 9.3 cents per kilowatt hour at the end
of 2011, well below most European countries. Prices have risen
8.3 percent since then, bringing the total increase to 23.3
percent since March 2011, and another 16 percent hike has been
But that may be too little, too late to cover the country's
soaring energy costs.
Israel lost 40 percent of its natural gas supplies last
February when saboteurs in Egypt's Sinai peninsula, seizing on
the chaos that followed the overthrow of President Hosni
Mubarak, began blowing up the pipeline that carried gas to
Israel. Gas did not flow for most of 2011 and Cairo officially
terminated the 20-year export deal in April.
The remaining 60 percent of natural gas, which is Israel's
main energy source, comes from a small offshore field that has
subsequently been over-taxed and is nearly depleted.
IEC has had to turn to more expensive fuels like diesel and
fuel oil, and at the start of the year said it may need an
additional $2.5 billion for those costs alone.
Had all this happened a year from now the effect would have
been minimal. Israel recently discovered huge offshore natural
gas reserves, enough to secure its needs for decades. But
production at the first field, called Tamar, is not due to begin
IEC lost 785 million shekels in 2011, despite revenue
jumping 24 percent to 24.5 billion shekels. With the halt in
Egyptian gas IEC said its fuel expenses soared to 25 billion
shekels a year from 10 billion.
Underscoring the urgency of the situation, Standard and
Poor's put IEC's "BB+" foreign currency rating on "CreditWatch
negative" in April, citing weak liquidity.
In late May, Moody's Investors Service's Israel affiliate
Midroog lowered its outlook for two of IEC's bonds to "negative"
from "stable", noting the utility would have trouble financing
operations without government backing.
ODDS ON REFORM
Though the ratings agencies say the government will not let
IEC default, Ron-Tal says the situation means it must focus on
financial rehabilitation at the expense of developing the
Thus the talks about "mini reform" are focused on opening
the country's power grids to competition and new investment.
Officials from the finance and energy ministries, IEC
management, the electricity regulator and union leaders are
under pressure to agree a deal that can be put to cabinet for
approval by the end of the year.
According to an official at the Finance Ministry who asked
to remain unnamed because of the sensitivity of the talks, the
current plan is leave IEC intact but to take power grid
management out of its hands and create a different entity -- a
dispatcher of sorts which could allocate resources from a
central network to which private firms also contributed energy.
"This will facilitate the creation of fair play and
competitive conditions for private electricity producers," said
Amit Mor, chief executive of energy consulting firm Eco Energy
and former Energy Ministry official and consultant to the World
The government began to introduce competition in the
electricity sector very slowly in 2004 when it granted a tender
to OPC, part of the Israel Corp conglomerate, to build
a private power plant. Since then private companies Dalia and
Dorad have also won licences to build private power plants. The
first will begin production in January.
By 2020 these plants could supply as much as 30 percent of
the country's electricity, Mor said, serving both IEC and some
of its current industrial clients and hastening the need for the
former to restructure if it hopes to maintain market share.
However, the success or failure of the planned reforms
hinges largely on whether the government can cut a deal with
labour. IEC wants to offer early retirement to reduce its
workforce by 2,000 and scrap perks like free electricity. Union
leaders want to limit the cuts to 1,000.
Observers decline to lay odds on the chances of an agreement
"Much depends on the flexibility of the government, the
company and employees. The parties are aware of the gravity of
the situation," said Mor.
"I hope that an agreement can be reached by the end of the
year. This is crucial for the company."