VZCZCXRO3942
RR RUEHROV
DE RUEHTV #0762/01 0721427
ZNR UUUUU ZZH
R 131427Z MAR 07
FM AMEMBASSY TEL AVIV
TO RUEHC/SECSTATE WASHDC 9930
INFO RUEHXK/ARAB ISRAELI COLLECTIVE
RUEHBR/AMEMBASSY BRASILIA 0049
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 TEL AVIV 000762 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NEA/FO FOR DANIN; NEA/IPA FOR WILLIAMS, SHAMPAINE, BELGRADE; 
NSC FOR ABRAMS, DORAN, WATERS; 
TREASURY FOR HIRSON 
 
E.O. 12958: N/A 
TAGS: ENRG ELAB PGOV KPRV IS
SUBJECT: GOI APPROVES REFORM OF ELECTRIC COMPANY DESPITE 
STRONG EMPLOYEE OPPOSITION 
 
Sensitive but unclassified -- please protect accordingly. 
 
¶1.  (SBU) SUMMARY: On February 18, the cabinet approved a 
proposal by Minister of Finance Abraham Hirchson and Minister 
of National Infrastructure Benjamin Ben-Eliezer to reform 
Israel's electricity market.  The reform plan is to be 
phased-in starting in 2008 and envisions dividing the Israel 
Electric Corporation (IEC) into three functional units: 
production, transportation, and distribution.  While GOI 
officials and press hailed the long overdue reform efforts, 
the IEC labor union protested with strikes and other 
unilateral measures.  The Labor Court subsequently issued an 
injunction temporarily prohibiting union sanctions and 
instructing the state to freeze the drafting of planed 
reforms in the energy sector.  The GOI and the IEC union will 
resume negotiations to discuss the workers' rights in the 
reform plan, but the IEC threatened to strike again as early 
as March 11 if no agreement is reached.  Critics maintain 
that despite the cabinet's smooth passage of the reform plan, 
the GOI is still too weak to impose its will on the IEC. 
They claim it is a bloated and inefficient entity controlled 
by its 13,000 employees and by retirees receiving generous 
pensions.  Hirchson suggested that the parties would reach an 
agreement "within the next few months," and promised that 
Israeli citizens would "not be held hostage" by IEC 
employees.  While passage of the reform plan is a major 
accomplishment for the GOI, pursuing meaningful privatization 
and keeping electricity prices in check will be even more 
difficult without the support of the IEC union. END SUMMARY. 
 
-------------------------------- 
MAIN ELEMENTS OF THE REFORM PLAN 
-------------------------------- 
 
¶2.  (U) The Israel Electric Corporation (IEC) will be divided 
into three functional units: 
 
-- Electricity production.  In 2008, the electricity 
production unit will be split into four companies, determined 
by their use of coal or natural gas, which will begin 
operating in January 2009. 
 
-- Electricity transportation.  The electricity transport 
company will be established by the end of 2009, and begin 
operating by the end of 2010.  According to Gabby Levy, 
International Relations Director at the Ministry of National 
Infrastructure, because of Israel's small size, only one 
electricity transport company needs to be established. 
Within a year from the date of establishment, the cabinet can 
decide whether this company will remain a subsidiary of the 
holding company, or become a separate state-owned company. 
 
-- Electricity distribution.  Four or five electricity 
distribution companies will be set up by January 2009, 
similar to the current regional distribution network, and 
will begin operations in January 2010. 
 
Similarly, other subsidiaries for planning and building power 
stations, logistics, the purchase of fuels, and other 
functions will be established by January 2009 and will begin 
operating in 2010.  According to the approved plan, at least 
49 percent of production and distribution facilities would be 
privately owned by 2013. 
 
--------------------------- 
GOI ACTION LONG OVERDUE ... 
--------------------------- 
 
¶3.  (U) Calls for reforming the electricity sector are not 
new.  Since the early 1990s, management experts -- including 
KPMG, an international consulting firm hired by the Ministry 
of Finance (MoF) to evaluate Israel's inefficient energy 
sector -- have recommended splitting up the IEC.  In 2001, a 
panel of experts headed by Avi Ben-Bassat, then MoF Director 
General, also concluded that the IEC needed to be 
re-structured.  However, in each instance, the IEC employee 
union staunchly opposed the recommendation, arguing that the 
IEC should continue to be one unified company.  The GOI has 
made several attempts to reach an agreement with the union. 
In September 2006, for example, the GOI decided to 
restructure the company by including appropriate legislation 
 
TEL AVIV 00000762  002 OF 003 
 
 
in the Economic Arrangements Law.  The plan was to be 
implemented after negotiations with the workers assured them 
of proper compensation.  However, after a series of brutal 
strikes, the workers forced the GOI to eliminate the 
restructuring clause from the Arrangements Law. 
 
¶4.  (U) In press statements following passage of the reform 
plan, Finance Minister Hirchson referenced the IEC's 
substantial debt and emphasized the need for reform, adding, 
"The citizens of Israel cannot be held hostage to the 
employees of the company."   He promised that the government 
would not "surrender to any ultimatum" and suggested that the 
GOI is likely to reach an agreement within the next few 
months with IEC employees on preserving their rights in the 
framework of the plan.  Kobi Haber, MoF budget director, 
acknowledged that the proposed legislation was more 
complicated than the MoF had previously envisioned because 
Minister Ben-Eliezer had insisted that the workers be 
involved in negotiations throughout the process.  Striking a 
more cautious tone, Ben-Eliezer clarified that for the time 
being the reform plan would involve "reorganization," instead 
of a complete privatization of the IEC.  He claimed that the 
GOI cannot take too many risks and must move slowly on the 
project in order to ensure that there are no further power 
outages at the hands of the labor unions. 
 
------------------------------------- 
... BUT CAN THE GOI REIGN IN THE IEC? 
------------------------------------- 
 
¶5.  (U) A large cabinet majority passed the proposal: 16 in 
favor, two abstentions (Minister of Transport Shaul Mofaz and 
Minister of the Environment Gideon Ezra, both of Kadima), and 
one opposed (Labor Party chairman and Minister of Defense 
Amir Peretz).  The concession held by the IEC was slated to 
expire in March 2006, but, in the absence of agreement with 
the union, it was extended to March 2007.  The cabinet 
decided to extend the franchise by an additional four months, 
and made clear that any future extensions would require 
approval from the Ministers of Finance and National 
Infrastructure. 
 
¶6.  (U) The IEC's critics maintain that despite the cabinet's 
smooth passage of the reform plan, the GOI is still too weak 
to impose its will on the company, which they claim is 
controlled, de facto, by its 13,000 employees -- 9,700 of 
whom are permanent employees -- and retirees who receive 
generous pensions. 
 
-------------------------------------- 
MORE UNION STRIKES LOOM ON THE HORIZON 
-------------------------------------- 
 
¶7.  (U) As expected, following the GOI approval of the reform 
plan, the IEC protested by launching a series of unilateral 
actions.  These included blocking the transfer of information 
to IEC's board and government agencies and ministries, 
cutting off electricity to users in arrears, suspending 
training courses, and refusing to load coal at power stations 
during non-regular working hours, which triggered numerous 
blackouts in the south of the country.  The Labor Court 
subsequently issued an injunction temporarily prohibiting 
union sanctions and instructing the state to freeze the 
drafting of planed reforms in the energy sector.  On February 
21, the chairman of the IEC workers union, David Tsarfati, 
and the Histradrut labor union said they would abide by the 
court ruling and refrain from going on strike until after 
March 11. 
 
-------------------------------- 
ELECTRICITY PRICES BOUND TO RISE 
-------------------------------- 
 
¶8.  (U) IEC employees argue that re-structuring the company 
would lead to a hike in electricity prices.  However, as 
Haber pointed out, the price of electricity has been kept 
artificially low.  Without reform, rates are bound to 
increase even more because of excess costs associated with an 
oversized work force (comprising an estimated 2,200 
superfluous employees), inflated salaries, and wasteful 
management policies.  Moreover, breaking up the company into 
 
TEL AVIV 00000762  003 OF 003 
 
 
logical components -- production, transportation, and 
distribution -- and encouraging competition among five 
production companies and four distribution companies would 
promote efficiency, save money, and ultimately lower prices, 
he said.  (Note: The GOI supports a policy of privatization 
of government bodies and aims to allocate up to 20 percent of 
the IEC's generation capacity to independent power producers. 
 This is meant to promote competition and maximize the 
economic efficiency of the electricity market.  Privatization 
of the main oil refineries -- Ashdod and Haifa -- has already 
begun.  End note.) 
 
------- 
COMMENT 
------- 
 
¶9.  (SBU) The relatively smooth approval of a plan to reform 
the electricity sector and restructure the IEC represents a 
major accomplishment for the GOI -- Hirchson and Ben-Eliezer 
in particular -- at a time when ongoing investigations of 
political and corruption scandals have eroded the Israeli 
public's confidence in its leadership.  The GOI has up to 
eight months in which to reach an agreement with the IEC 
employee union on the restructuring plan before 
implementation begins on parts of the reform.  However, 
without union buy-in, promoting badly needed reforms and 
pursuing privatization while also ensuring that the lights 
stay on will prove to be a formidable challenge. 
 
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