State comptroller report determines government’s lack of overall policy and lack of regulation contributed to a monopoly in the sector.

Yaron Druckman
Published: 07.21.15

MK Eitan Cabel, the chairman of the Knesset’s Finance Committee, said Tuesday that Economy Minister Aryeh Deri has agreed to sign off on the proposed natural gas plan, but only if it is approved by the Knesset.

Deri has refused for a month to make use of Article 52 of the Antitrust Law, allowing him to circumvent the antitrust regulator and approve the agreement with the gas companies.

Earlier this month, the economy minister called for changes to be made to the gas agreement. “The gas issue is very complex and the public had to be exposed to it, and the Knesset needs to be exposed to it, this is not an issue that is resolved in the cabinet,” he said. “It’s not an issue for one minister, no matter how senior, to take on alone. Everyone needs to share that burden.”

Tuesday was the final day of the public hearing at the committee on the proposed natural gas plan. The Finance Committee also discussed a report by State Comptroller Yosef Shapira on “Development of the Natural Gas Market.”

“The conduct of the government and all of its branches in issues relating to the natural gas sector was deficient and non-cohesive. For various reasons, some of which the government’s conduct contributed to, a monopoly was created in this field,” the comptroller said in his report, released on Monday.

He criticized the regulation of the gas industry, stating, “Regarding such an important issue the government has to act as would a harmonic orchestra with a conductor at its head,” adding that the price of natural gas, despite the monopoly, should be competitive. The comptroller called to correct the deficiencies as soon as possible.

The comptroller emphasized that Israel owns the natural resources in its territory, including the large natural gas deposits discovered in Israeli waters, and therefore, “as with any asset held in the hands of the state, which includes its natural gas reserves, the state and all regulatory bodies must act devotedly for the benefit of the public interest.”

The comptroller found serious flaws in regulation: “The findings indicate a lack of overall government policy, a lack of effective action, activity at a slow pace and partial regulation, to the point of a total absence of regulation in many areas.”

He added that as a result of this, “in many areas these deficiencies have created friction between the regulatory bodies themselves and the holders of the rights to the gas. All these factors have caused delays in the development of the gas industry, and may prevent the state from fulfilling the entire underlying potential of this resource.”

Regarding the monopoly created in the gas industry, the comptroller wrote that “throughout the years, the government’s actions did not prevent the creation of a monopoly in the supply of natural gas, and even placed the state under various constraints to cope with the consequences of the monopoly.”

“Thus for example, a determined policy for the development of small and medium-size gas fields was not completed, which could contribute to competition in the industry, a course of action was not formulated to attract operators with proven and significant professional experience in the field of the discovery of natural gas, and even though 46 search licenses were given to partnerships, which included search operators, only one highly experienced operator was able to discover the natural gas fields in the territories for which it received licenses.”

The report states that “it raises doubts about the ability of the other operators to discover natural gas. Thus an excessive dependence was created on gas production from one field, flowing from one limited-capacity pipe, and the market was left without backup and with redundancy in the supply of natural gas.”

Pertaining to the price of gas, the comptroller wrote, “As far as the content of the plan is concerned, it is important to stress that given the existence of a monopoly in the supply of natural gas, one must ensure that the price of gas will be competitive.” He added, “With regard to this aspect, it must balance between the need to develop the gas industry for the benefit of the general public and the need to look after the consumers’ interests and reduce the cost of living in Israel.”

In addition, the comptroller wrote that the price control committee, which is joined up with the ministries of finance and energy, tracked the prices and profitability of natural gas for about two years. Despite the existence of a monopoly in the supply of natural gas, the committee did not formulate a method, nor did it set parameters and criteria that would enable it to decide what level of oversight to recommend.

The committee also did not raise the difficulties in making the decision on the level of oversight before the ministers in charge of operations. The result, the comptroller added, is that it has yet to be decided whether there will be supervision, and if so, what level of supervision will be imposed on the price of natural gas.

The comptroller recommends that prior to approving the gas plan the government has to establish supervision and control mechanisms on the implementation and achievement of its objectives, and to stress that if the gas companies do not meet their obligations, then the government can re-examine the issue in accordance with its authority; this despite the “stability clause”, in which the state will declare its intention to avoid making significant changes to arrangements made for a period of ten years.

He added that the government should make sure that as long as there is a monopoly in the supply of natural gas, the gas price will be competitive. “To this end, it must examine the need to use a variety of means at its disposal, first and foremost price controls. In this framework, it must balance the need to develop the gas industry and the impact of gas prices on the cost of generating electricity and the cost of living,” wrote Shapira.

The Ministry of Energy and Water Infrastructure said in response to the report: “The ministry believes, as the comptroller determined in this report, that the multiplicity of regulatory bodies – both authorized and even not authorized, the lack of coordination between them and the taking of pointed decisions without examining their effects on the entire natural gas industry, are what increased the uncertainty and led to a significant portion of the deficiencies indicated by the comptroller. Over the course of years, various actors intervened in the market, without authority and without accountability.

“Despite this intervention, the ministry is making great efforts to promote Israel’s energy independence, and the natural gas market, both in terms of the infrastructure and the economy. It does this professionally and efficiently, which was proven by the rapid development of the Tamar reservoir and the maritime link, in comparison with international norms. In addition, the ministry granted detailed possession deeds which entrench the public interest, rules were established to transfer rights, a growth committee was convened to regulate the issue of export.

“The natural gas pipeline was spread out to a length of 500 km which is connected to all the relevant power plants and most of the major industrial enterprises. Within a dozen years, the country has moved from zero to 50 percent of electricity generation from natural gas – a large volume on a global scale. The ministry has led to savings of more than NIS 40 billion to the market thanks to its wise management of the natural gas industry.

“The ministry believes that the solution to the deficiencies indicated by the comptroller lies in the concentration of powers in the central regulator, the ministry of national infrastructures, energy and water. It is fitting that the one who bears responsibility will also have the authority. Our professional position and all our activities were brought to the attention of the comptroller. Unfortunately, a significant amount were not reflected in the report.”,7340,L-4682438,00.html