As part of its research on benchmarking of electricity tariffs concluded at the beginning of 2010, in order to examine whether the tariff is too low as IEC has been claiming, the World Bank has reported that salaries at IEC are the highest compared to similar global electricity utilities and that the tariff is indeed low. Total wages cost 1.42 billion shekels a year and over 250 employees are earning more than 40,000 NIS per month gross. The World Bank has stated though that the number of employees in the company is comparable to other similar size monopolies. The World Bank says that Israel’s electricity tariffs at the end of 2008 were 20% lower than in countries to which it was compared. The average gross monthly salary at IEC was around NIS 30,000 in 2008, 38% higher than the average salary in other electricity monopolies which the World Bank used in its comparison. At the same time, IEC’s workforce is similar in size to the workforces in comparative utilities in South Korea, the Czech Republic, Malaysia, Ireland, Greece, and Portugal, among others. The World Bank adds that IEC has been forced to reduce investment in recent years to a less than desirable level because of the low electricity tariffs, high debt to equity ratio, and high salary costs. The World Bank concludes that IEC will find it difficult to finance the investment necessary in 2010-13 to meet expected electricity demand, given the electricity tariffs set by the Public Utilities Authority (Electricity). The World Bank also concludes that in order for IEC to finance half of investments from internal sources, and take on new debt to balance investment needs, it is necessary to raise electricity tariffs by 3-5% over the next four years.

On 1st February, 2010, The Electricity Authority unanimously approved new electricity rates, as the natural gas revolution begins to take hold in the energy sector. As of February 15 the electricity rate for residential consumers dropped by 9.6% to 41.32 agorot per kilowatt hour, down from 43.59 agorot per kilowatt hour. Rates for commercial and public institutions are dropping by 16.3% to 43.59 agorot per kilowatt from the current rate of 52.09 agorot. The rate for large-scale electricity consumers will fall by 8.6% to 12.5%, based on the voltage supplied. The plenum accepted an expert opinion prepared by Dr. Ilan Maoz, who said that an increase in electricity demand would still leave the company with double-digit production reserves. The rate decrease reflects a NIS 2.2 billion decline in the IEC’s annual fuel budget due to a greater reliance on natural gas, which comprises about 40% of its fuel consumption. Natural gas is also more efficient for electricity production. In total, the IEC’s fuel costs have been reduced by 24.6%. The rate adjustment was to have been implemented in April 2009, but was delayed.

The Electricity Authority also adjusted the IEC’s rate base for the first time since 2002. The rate base is a group of basic assumptions used to calculate the long-term price of electricity production, conduction and delivery, and serves as the foundation for setting consumer rates. The authority adjusted only operating costs, which increased by 7.8%, offsetting the lower fuel costs. Transmission and distribution elements will be adjusted later during 2010. The authority also adjusted its seasonal and peak consumption pricing method for large-scale consumers. It changed peak, shoulder and off-peak consumption load times, which are the basis for their rates. The winter season was reduced from four to three months, and summer from three to two months. Electricity rates in these seasons at peak hours increased by 11% to 13% (in winter) and 17% (in summer). Rates for heavy consumption times during the rest of the year, which is now seven months, were cut by 16% to 23%, and at peak hours by 35%. The return on equity in the generation segment will be 7.35% (9.5% before tax) compared to 7% in the former base.

MNI Minister Uzi Landau is saying that the cost of renewable energy for Israel will be $2 billion. He explained the state would invest $300 million and would then give 70% tax benefits to local and international companies. He explained that this would all lead to a hike in the electricity prices of about 18% between 2010 and 2020.
The PUA chairman Amnon Shapira explained that indeed the tariff was likely to increase due to $300 million a year needed to be invested in renewable energy and the need to approve within the tariff the cost of the upgrade of the electricity grid. The PUA has stated that the electricity prices would increase annually by 3-5% due to the penetration of renewable

Pros and cons of lower tariffs:

Pros
Tariffs are supposed to reflect the cost of producing electricity. Tariffs should rise when the price of fuels rises and should fall when the price of fuels falls. All other considerations such as encouraging energy savings, and energetic streamlining, should be encouraged through taxation or subsidies with the appropriate approvals. Lower tariffs reduce inflationary pressures and strengthen the competitiveness of exporters. Lower tariffs are also more social friendly and improve the situation of the disadvantaged. Lowering electricity rates will also indirectly result in other prices being lowered such as water and additional sectors where energy costs are a central factor.

Cons
Lowering the tariff of a product in excessive demand such as electricity will lead to increased consumption and in the long-term will require the construction of even more polluting power stations. Lowering electricity tariffs contradict government policy which is attempting to encourage energetic streamlining. Electricity tariffs in Israel were already among the lowest in the western world, so there is no reason to cut them further. These low tariffs are one of the main reasons for the difficult financial situation of IEC.
Low electricity tariffs create a negative incentive for the entrance of private electricity producers into the market. This may delay and even endanger implementation of the reform of Israel’s electricity sector, and in the long term the lack of competition from private producers may result in higher prices.

In March 2010, IEC has stated that they want to increase electricity tariffs by 5% to help pay for the emergency generation program, thus getting 2.7 billion shekels from the public over the next 2.5 years. IEC CEO Amos Lasker wrote of his request and IEC’s need in a letter to PUA Chairman Amnon Shapira to try to get an approval. In his letter Lasker explains that the new base for tariff for the generation sector does not even cover the current expenses that IEC will have to pay over the next few years and is certainly not sufficient to finance the multi-billion dollar emergency program and thus IEC has no choice but to turn to the public. If the tariff is increased by 5% for the next 2.5-3 years this will cover about 40% of the expenses needed to complete the emergency generation program, with the remainder 60% to be funded from suppliers’ credit (1.9 billion shekels). Lasker explained that the BoD forbade management to proceed with the 2nd phase of the development program without first obtaining significant external funding. He added that IEC cannot take on further debts as that would seriously jeopardize its ability to repay its debts and reminded all that in September 2009 Maalot rating agency warned that IEC’s credit rate could be decreased if it entered into further debts. He explained that IEC’s cash flow cannot provide for more than half a billion shekels a year as an internal source for funding any investment program. Lasker adds in his letter that completing the emergency program is vital to prevent electricity blackouts and meets the government’s policy as decided in 2008 which includes building five new CCGT power stations for a total capacity of 1,750 MW at a cost of 8 billion shekels in total. The plan has been divided into two stages: the first state at a cost of 2.4 billion shekels was implemented as of 2008 and to be concluded in 2010 and the second stage at a cost of 5.6 billion shekels to be implemented between 2010 and 2012. In 2009, the government allowed IEC to increase the electricity price by 4.2% to fund the first stage of the plan, but currently the PUA is opposed to a similar increase to fund the second state. The PUA’s view is that the existing reserves of electricity are sufficient to meet consumption needs and there is no need to construct any new stations yet.
In addition, IEC has stated that the February 2010 decrease in electricity tariffs would seriously damage the company’s financial standing, impair its ability to raise funds and its expected cash flow