A confidential report revealed here for the first time shows why consumers will have to settle for a cut of only 10% in electricity rates. Over the years, Israelis have paid less than they should have paid for electricity, according to US consultant firm Navigant, which has been hired by the Public Utilities Authority (Electricity).
In recent months, senior government officials have been making promises that the electricity rate will be cut by 12-15%, starting in February. This week, however, the Public Utilities Authority (Electricity) announced that the price would fall by only 10% on February 1, apparently following a report submitted by Navigant asserting that the Israel Electric Corporation's (IEC) (TASE: ELEC.B22) transmission and distribution rate had not been revised for 12 years, and that now is the time to do just that. According to the report, this length of time without any revision is exceptional; this rate is usually revised every five years.
The electricity rate is composed of four elements: production, transmission, distribution, and supply. Each element affects the rate paid by the consumer. When IEC had to more than double its fuel expenses, following the natural gas crisis in Egypt (NIS 21 billion instead of NIS 9 billion), the electricity rate for consumers rose 30%. Now, after the gas crisis has ended, and IEC's fuel expenses fell to NIS 6.1 billion in 2014, the cost of electricity production has also fallen, making it possible to also cut the consumer price - the only question is by how much.
In November 2013, the Public Utilities Authority (Electricity) hired the services of international consultancy firm Navigant in order to consider whether and how to revise the electricity rates for IEC's transmission, distribution, and supply elements. The Public Utilities Authority (Electricity) reportedly paid $300,000 for this work.
Navigant collected information about IEC's costs relating to operating the transmission system and distribution and supply of electricity, and calculated how much it cost the company to operate the network. According to the report findings revealed here, the costs currently recognized by the Public Utilities Authority (Electricity) for the company do not cover its expenses, and the transmission and distribution rate should therefore be raised by NIS 300 million a year.
Senior electricity sector officials claim that during the 12 years in which the Public Utilities Authority (Electricity) did not recognize the correct costs, IEC accumulated a debt of up to NIS 12 billion.
Upon receiving the report, the Public Utilities Authority (Electricity) took into account the additional costs that it must now recognize for IEC, and these were deducted from the public electricity rate cut.
How much does a systems management unit cost?
Navigant's report also refers to the question of the cost of a unit for management of the IEC system. It calculated that the annual cost is NIS 150-200 million. The purpose of this unit is to control the processes of producing, delivering, transmitting, and transforming the electricity produced in the economy.
Determining this cost is particularly important, given the possibility that this unit will be removed from IEC, and the calculations that must be made if this happens. With the entry of the private electricity producers and the forecasts of an increase in the private sector's market share in electricity production, a need has emerged to separate management of the system from IEC for the purpose of generating a competitive and transparent environment. There is now no dispute that reform of IEC should include making this unit a separate government company.
The Public Utilities Authority (Electricity) stated in response, "The Public Utilities Authority (Electricity) issued a tender to find an international consultant firm to determine network rates, after years during which the figures disclosed by IEC were unreliable and unreasonable. It was accordingly decided to hire an experienced international consultant firm to determine transmission, distribution, and supply rates. The consultant firm also severely criticized the quality of the data provided to it by IEC.
"At the same time, the Public Utilities Authority (Electricity) decided on over NIS 1.3 billion in advances on the rate. Beyond that, the Public Utilities Authority (Electricity) is not responding to the unfounded assessments by anonymous parties that ignore the supplements received by the company, including the increase in the supplement for additional energy, the company's failure to meeting the streamlining goal set for it, its inefficiency, and the transfer of billions of shekels to its employees' pension fund. The Public Utilities Authority (Electricity) will continue to operate in a business-like and professional manner for the benefit of the public interest, as it has been charged to do in this important public task."
IEC said in response, "The distribution and transmission rate has not been revised since 2002. IEC is conducting a continuous dialogue with the Public Utilities Authority (Electricity) for the sake of recognizing the necessary costs for continued development of the electricity sector from a long-term perspective."
Published by Globes [online], Israel business news - www.globes-online.com - on January 28, 2015
© Copyright of Globes Publisher Itonut (1983) Ltd. 2015