"Israel can't have power industry competition"

Hadera power station
Hadera power station

British industry expert John Astrop says trying to create competition will do more harm than good.

"In a small country like Israel, the attempt to generate competition can do more harm than good. A regulated monopoly is the least of all evils," asserts John Astrop, a senior executive for decades in British Gas (BG) with over 35 years' experience in the energy industry.

Astrop was also BG VP for Israel in 2001-2005, and was responsible for negotiations on natural gas and electricity matters. He was also commercial director at Kinetica, one of the largest energy producers in the UK, in the 1990s, and a senior executive at PoweGen North Sea, an oil and gas exploration company. In a special "Globes" interview, Astrop talks about opening the Israeli power industry to competition, and where it will lead.

Israel has an electricity monopoly in the entire electricity chain: production, transmission, and distribution to end users, in contrast to other countries, where there are several companies responsible for producing power, or there is at least separation between the company that produces the electricity and the one that distributes and supplies it.

As part of the attempt to solve the problems that a monopoly creates, the regulator is trying to create competition, at least in the electricity production segment, while accepting the fact that transmission is a natural monopoly.

"Globes: How do you think a power industry should be run? How can we tell what the right degree of competition is?

Astrop: "I definitely think competition is a good thing, and in most cases leads to a more correct result in terms of efficiency and end consumer prices. Things are a little different, however, when complex areas like the electricity industry are involved. That's certainly true when you're talking about a country like Israel. I'm astonished at the regulator's wanting to create competition in the electricity sector in Israel."

Why the astonishment?

"The power industry is a very complex sector, and it's very hard to create sustainable competition in a sector like that. Israel's a small country that consumes a very small amount of electricity, and isn't hooked up to the electricity network of other countries, as is the case in Europe, for example. It's very difficult to create sustainable competition in a sector like this."

The government has encouraged the entry of private producers who are expected to generate 19% of the electricity used in the economy by the end of 2014. Isn't that competition?

"No. Real competition means the existence of a large dynamic market in which wholesale and retail electricity deals take place every day. In the UK, for example, buyers look for price offers from electricity suppliers every day. Because of the market's size and diversity, the consumers get the best price offers whenever they need them, even at one-hour intervals. Try to imagine the kind of trading that takes place every hour on the stock exchange. It's an ideal situation that exists in large countries like the UK, France, and Germany, and even there it's hard to implement."

How do you get to a situation like that?

"In order to achieve that kind of situation, you need 4-5 companies of about the same size that can compete with each other. Unfortunately, there's no chance of getting it in a small market like Israel."

The Public Utilities Authority (Electricity), which regulates the electricity sector and is responsible for setting power rates, has been talking for months about lowering the electricity rate for consumers (the rate rose 30% in 2011). The government is talking about a rate cut of over 10%, and Minister of Finance Yair Lapid said a few days ago that electricity rates in Israel would be slashed on January 1, 2015 "by a double-digit percentage," which would cause "relief that every person will feel in his pocket."

"Globes": Won't introducing competition help achieve this goal of cutting the power rate?

Astrop: "The regulator's incentives for production of electricity by private companies aren't encouraging competition. In my opinion, there's a chance that the introduction of private electricity into Israel will not only fail to lower the price for the home consumer, but is even liable to have the opposite result. It's liable to enrich the private power producers at the expense of Israel Electric Corporation (IEC) (TASE: ELEC.B22), which will have to roll the loss over onto the private consumer, in other words raise its rates."

That's a strong statement. Can you explain why?

"The private power plants sell their electricity only to very well-off customers, which in English is called 'cherry-picking.' The regulator is encouraging large reliable customers to switch to a private company, which doesn't help the other customers. The intended candidates for switching are energy-intensive industrial plants with large consumption. The private power plants select their customers, while IEC has to supply electricity to all the home customers, everyone, and is not allowed to decide not to supply electricity to a specific difficult customer. I'm not an IEC spokesman, but I'm sure that the fact that private electricity is taking these large customers away is affecting the bottom line in IEC's profit and loss statement.

"Furthermore, under current regulation, private power stations aren't allowed to sell electricity to those home consumers. It appears that the regulator mistakenly believes that he's encouraging competition in the electricity sector. In my opinion, that's not what he's doing. The regulator is even weakening IEC, a government company supported by the public's money. Not only is no one promising that this 'competition' will lower the prices for the consumers, but it is liable to cause damage, and even raise the rates."

Astrop asserts that Israel should realize that it will be very difficult or impossible to create perfect competition in the electricity sector that will also result in lower prices for all consumers. He says, "A monopoly might be the best of all evils in the case of Israel, provided that good regulation and supervision preserves the balance."

"Globes": It is claimed that regulation in Israel is excessive and makes it hard for a business firm to operate. IEC is supervised by many regulators: the Public Utilities Authority (Electricity), the Antitrust Authority, and the Ministry of Environmental Protection, for example.

Astrop: "It's really cumbersome. At the same time, the alternative isn't simpler or better. Energy sectors, including electricity and gas, are very complex, maybe more complicated than any other sector. They therefore require constant extensive regulation and supervision, with or without competition. The Israeli regulator's attempt to create competition in power production like they have in economies with real competition, such as the UK, requires constant regulation and supervision. In the world of energy, regulation and supervision never end. In industries like food and footwear, the market can be so perfect that you can 'let the market do its thing,' but not in the electricity industry. You need supervision and control of the companies in the sector every minute."

Private producers: The state talks about competition, but regulation is doing the opposite

Private Power Producers Forum CEO Itai Eiges says, "The state has been talking for years about introducing competition in the electricity sector for the benefit of the Israeli consumer, but in practice, regulation is doing the opposite. Private electricity producers in Israel have not only proven that they are more efficient than IEC, but are also producing electricity at lower cost and selling it more cheaply to their customers, who include IEC itself. We call on the Israeli government to open the electricity sector to real competition, in which electricity producers will be able to sell electricity to everyone in Israel, thereby lowering the price of electricity in Israel for anyone who wants it. Unfortunately, we have seen a series of decisions recently that, instead of increasing the proportion of private power production and increasing competition, are destroying the private producer, increasing uncertainty, and causing almost irreversible damage to the ability to obtain financing for building power plants."

IEC declined to respond.

Published by Globes [online], Israel business news - www.globes-online.com - on October 23, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

Hadera power station
Hadera power station
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