After announcing electricity rate cuts, the Public Utilities Authority (Electricity) says that the rate will be put back up if the natural gas agreement is not changed.
In an opinion published today, the Public Utilities Authority (Electricity), headed by chairperson Orit Farkash-HaCohen, wrote that the maximum price of natural gas should be the same as the option price for Israel Electric Corporation (IEC) (TASE: ELEC.B22), and should be linked to competitive markets. The opinion was submitted to the Ministry of National Infrastructure, Energy, and Water Resources, which held the public hearing on the gas agreement that ended three weeks ago. The Public Utilities Authority (Electricity) has not yet published its comments on the agreement.
According to the Public Utilities Authority (Electricity), the price mechanism proposed in the agreement, in which the price of gas in the new agreements will be determined by the average gas price in contracts signed in the preceding quarter, will lead to the reservoirs to be sold, such as Karish and Tanin, being priced according to the prevailing price trend. "As a result, new gas suppliers entering the market will find it difficult to offer lower prices in the future," the Public Utilities Authority (Electricity) asserts, adding, "Neither reopening the price in the IEC agreement, which is scheduled for 2021, nor the reopening of the quantities in the gas agreements of private producers in 2021 can bring about a decrease in the gas price, despite the entry of new gas suppliers into the market."
The opinion states that the excess cost that the public will pay for implementation of the gas agreement, instead of adopting the Public Utilities Authority (Electricity)'s proposal, is NIS 7.3 billion, adding the price of gas can be expected to rise 30% by the end of the next decade. According to the opinion, prices have already risen 1.6% just over the past year, and prices will continue to inch up. Gas, which accounts for 20% of the price of electricity, will obviously affect electricity rates.
If the state does not address the gas agreements signed in 2014, "The Public Utilities Authority (Electricity) will have to revise its decision about the cost to the public, and in effect reverse its intervention to date in the monopolistic prices in the gas agreements. This will in effect cause a steep rise in the electricity rate for the public , merely due to the gas item," the opinion states. The Public Utilities Authority (Electricity) announce only last week that it would cut the electricity rate by 17%.
Attached to the opinion is an assessment of what the situation will be in 2021 according to the draft gas agreement, compared with the situation under the revision proposed by the Public Utilities Authority (Electricity). The assessment asserts claims that under the draft agreement, the gas price for IEC will reach $6.53 per mmbtu in 2021, and the average price in the economy will be $6.23. In contrast, under the proposed revision, the price in new contracts signed will be according to the option price, which will be $5.54 for that year.
Finally, the Public Utilities Authority (Electricity) says that such opinions, "which for some reason have not been published," will not be possible in the future, because the Economic Arrangements bill subordinates the Public Utilities Authority (Electricity) to the Ministry of National Infrastructure, Energy, and Water Resources.
Published by Globes [online], Israel business news - www.globes-online.com - on August 12, 2015
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