In March 2011, the Public Utilities Authority (Electricity) made one of its most problematic decisions: it agreed to reschedule Israel Electric Corporation's (IEC) (TASE: ELEC.B22) NIS 2 billion debt to consumers over 15 years. The debt would be repaid by a negligible 0.5% annual reduction in electricity rates through 2025.
The rescheduling of the debt payments was designed to help IEC finance the construction of three natural gas-fired power stations. The Public Utilities Authority initially rejected IEC's request, but ultimately capitulated under heavy pressure from the Ministry of Finance and Ministry of National Infrastructures, which asserted that expanding the power stations was critical for the economy.
The Public Utilities Authority's capitulation has cost the public an electricity rate cut of at least 10% in 2011. Although the reduction would have only been temporary, the same can be said of the 15% rate hike, which means that the rate cut would have prevented most of the harm caused to the public.
The oddest thing about the decision is that it is not even certain that the Public Utilities Authority had the legal authority to make it. The Public Utilities Authority operates pursuant to the Electricity Economy Law (5756-1996), which authorizes it to set electricity rates and oversee the operations of IEC and private power producers.
The Manufacturers Association of Israel, which opposed the decision to reschedule IEC's debt, filed a legal brief, which argued that the rescheduling was tantamount to a tax, and that he Basic Law: The State Economy (5735-1975) stipulates no taxes without legislation.
More interestingly, the Manufacturers Association contends that the rescheduling is tantamount to a loan: IEC holds NIS 2 billion that does not belong to it, but belongs to the public, and it should therefore repay the loan immediately, plus interest. This raises the question whether the Public Utilities Authority has the authority to grant loans to IEC, and if it does, why did it grant such lenient term.
IEC pays 8% interest and more on the capital it raises overseas. So far as is known, it gave the Public Utilities Authority no liens to ensure that it will repay the loan. The Manufacturers Association says that if such a loan was granted, the Public Utilities Authority should change the same interest charge by banks and financial institutions.
A source in the electricity market told "Globes", "This harms one of the fundamental principles of electricity rates policy, which is the raison d'etre of the Public Utilities Authority."
The Public Utilities Authority said in response that the precedent was set in 2007, when then-Minister of National Infrastructures Benjamin Ben-Eliezer ordered IEC to build the power stations under a two-stage emergency plan. It was decided at the time to finance the project by raising electricity rates. The expansion of the three power stations for which the debt has been rescheduled are the second stage of this emergency plan.
Amnon Shapiro, chairman of the Public Utilities Authority at the time, told "Globes" today that the authority had no alternative but to come to IEC's aid because of its dire financial situation, expectations of an electricity shortage, and the government's refusal to inject capital into the company or help it in any other way. "The company simply had no way to carry out the development plan, and in such a case the regulator, which is obliged to implement the plan, simply had no choice."
"Globes": In your opinion, did you have the legal authority to grant a loan to IEC?
Shapira: "Every electricity rate can be considered as a kind of loan. The regulators in Israel and in other countries have broad discretion in setting rates in order to achieve objectives set out by law. What is true is that before approaching the owners or consumers, the company has the obligation to first streamline."
A request by the Manufacturers Association and the Federation of Israeli Chambers of Commerce to review the decision was rejected.
Published by Globes [online], Israel business news - www.globes-online.com - on October 25, 2011
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