This morning, the Yogev Committee published its recommendations for dealing with the problems of the Israeli electricity market and Israel Electric Corporation (IEC) (TASE: ELEC.B22).
The report states, "The electricity market is controlled by an inefficient monopoly, IEC, which suffers from a severe finacial position, and a workers committee that fights competition out of a built-in conflict between the interests of the company, and the interest of the state in ensuring competition in the electricity market." The report warns of the danger to the regular supply of power because of independent power producers' difficulties in gaining a foothold in the market, and because of inadequate production reserves.
At the heart of the Yogev Committee's report is a proposal to restructure Israel's electricity market by 2025. It proposes that IEC's power stations at Ramat Hovav, Alon Tavor (land for a future power station), and Eshkol, which have an aggregate production capacity of 2,500 megawatts, should be sold to private investors. This capacity amounts to 20% of Israel's production capacity, which will be privatized, thereby increasing the independent power producers' market share to 42% by 2025.
Another measure that should foster future competition is the incorporation of all IEC's natural-gas power stations into a subsidiary, which will be wholly owned by the utility at this stage.
The report proposes encouraging independent power producers to compete in the power supply sector, i.e. sales to end consumers. Competition in electricity will be on the basis of daily tenders, which should guarantee a competitive price for the electricity sold to consumers. To facilitate fair competition, IEC's grid management unit, which, among other things is responsible for purchasing electricity from power stations, will be spun off into a new government company.
In addition to competition in the power production sector, the Yogev Committee recommends partly opening to competition the electricity distribution grid sector (the grid from substations to end consumers). It recommends allowing private electricity distributors to serve 10% of customers (up to 250,000 customers). It also recommends switching to digital electricity meters, which will enable household consumers to switch to electricity tariffs that vary over the course the day, and to benefit from lower electricity prices during off-peak hours.
The Yogev Committee also recommends establishing a market for natural gas surpluses. As for IEC itself, the committee recommends a series of structural measures to streamline the utility. These include switching all IEC managers to personal contracts. Currently only seven executives out of the utility's 13,000 employees are employed under personal contracts.
The committee recommends cancelling the workers' committee veto rights at disciplinary hearings and in the selection of managers (the parity principle), and cancelling the employees' free electricity benefit.
In the chapter on IEC's financial soundness, the Yogev Committee recommends raising the utility's equity to balance sheet ratio from the current 16% to 35% by 2025. To achieve this target, it recommends a series of measures, including floating 15% of IEC in two stages, transferring to the state real estate assets that are unrelated to IEC's operations in exchange for converting NIS 5.5 billion in debt owed to the government, withdrawing the full NIS 1 billion balance in IEC and the workers committee's special trust account for paying future benefits to pensioners, and reviewing expensive development plans to reduce emissions from the Orot Rabin Power Station in Hadera.
The Yogev Committee estimates that the transfer of IEC property and the sale of power stations will reduce the utility's debt, which currently exceeds NIS 70 billion, by NIS 3-4 billion.
Published by Globes [online], Israel business news - www.globes-online.com - on March 23, 2014
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