Cost-benefit analysis of reforming Israel's electricity industry

In June 2003, the Israeli government decided to reform the Israeli electricity industry, which is currently dominated by Israel electric corporation (IEC), a government-owned vertically integrated electric utility. The first step of the planned reform will be taken in 2006, when IEC will be functionally separated into generation, transmission, local distribution, and customer services. Immediately thereafter will be the second step, which by 2012 will result in the deregulation and privatization of the wholesale generation and customer services. Transmission and distribution (T and D) services will remain regulated but will be available to all T and D users under mandatory open access. This paper summarizes a cost-benefit analysis of the government's reform plan. Relative to a regulated regime, the government's plan, even if carried out flawlessly, may only yield a small net benefit. However, it entails a large increase in electricity producer profit and government tax receipt, at the expense of electricity consumers. A less-than-perfect transition to competition can easily wipe out the potential gain of the government plan. Market reform experience to date shows that electricity market reform can easily fail, and the factors for success do not exist in Israel. Since the outcome of a failing reform can be disastrous, it will be imprudent to implement the government's plan in 2006, when the current electricity law expires. Hence, we recommend performance-based regulation for the period of 2006-2010. Subject to an updated cost-benefit analysis, possible decentralization, privatization and competition may follow.