The shekel-dollar exchange rate continues to climb towards NIS 3.7/$. Since the low recorded on July 23 this year, the rate has risen by more than 7%. The rise in the exchange rate, if it is sustained, can be expected to lead to rises in the cost of goods and raw materials imported into Israel, and, as a consequence, to rises in fuel, water and electricity prices.
Given the current rise in costs, the question arises with greater sharpness whether Israeli consumers did not miss out on a reduction in electricity prices that would have taken place if the Israel Public Utilities Authority Electricity (the Electricity Authority) had revised the tariff at the originally scheduled date, when the shekel-dollar exchange rate was still low.
The electricity tariff is updated annually at the beginning of April. It is set according to costs of production, transport and distribution of electricity, and a large proportion of these costs is paid in foreign currency. Israel Electric Corporation's (IEC) main foreign currency expense is for the purchase of fuels for power production, and this item represents almost 60% of the tariff. IEC spends some NIS 5 billion annually on importing coal, and over NIS 1 billion on diesel and fuel oil. The price of Israeli gas that IEC buys from the Tamar reserve, to the tune of over NIS 5 billion a year, is also denominated in dollars.
Besides the cost of fuels, IEC also has to pay for expensive imported parts and equipment for construction and routine maintenance of its power plants. In addition, as is well known, the electricity monopoly has to service a huge debt of some NIS 70 billion, which costs nearly NIS 3 billion a year. A substantial portion of the debt is denominated in dollars.
On the orders of the power industry regulator, the Electricity Authority, IEC has started, at its own expense, to hedge the debt in order to reduce its exposure to currency fluctuations, but it still has old debt to the tune of some NIS 3 billion that is hedged by its consumers. Economists estimate that the net result is that every percentage point rise in the shekel-dollar exchange rate translates into a half point rise in the electricity tariff, and vice versa.
The current electricity tariff was set in April 2013, when the shekel-dollar rate was at NIS 3.63/$. In April 2014, the rate was at NIS 3.467/$, that is, 4% lower. On the face of it then the electricity tariff for 2014 ought to have fallen by up to 2%, assuming that the other components of the tariff were unchanged.
The Electricity Authority objects to this conclusion. The Authority argues that the tariff should have risen by 4% in April this year, and so the appreciation of the shekel could at most have offset some of the rise. The rise in 2014 was decided on three years ago as part of the program to rescue IEC, which got into severe cash flow difficulties because of the halt in gas supplies from Egypt.
IEC had to buy alternatives to the cheap Egyptian gas at an extra cost of NIS 10 billion, and demanded an immediate rise in the tariff of 40%. The Ministry of Finance decided to spread the rise over three years in order to soften the blow to the economy, and the last stage in the price rise was due to have taken place this year.
But instead of raising the electricity tariff in April as planned, the Electricity Authority decided to defer the tariff review until the repayment of IEC's extra fuel expense was complete. The costs of power production, which are updated every year around March, will be updated this year in November, and the tariff itself is supposed to be revised in early 2015, and, if politicians promises are to be believed, to fall by a double-digit percentage.
And what about the money that IEC gained in April-August as a result of the tariff not being revised? A rough calculation will show that it made over NIS 100 million in the period in which it used a tariff that incorporated an out-of-date dollar exchange rate. The Electricity Authority says that every month it compares IEC's actual expenditure on fuels with its revenue from the tariff, and takes account of any surpluses in the annual tariff review, so that the money should be returned to the public at the end of the year at the latest.
Published by Globes [online], Israel business news - www.globes-online.com - on October 7, 2014
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