Letter of Sector Policy

The power sector in Palestine has been severely neglected.  Systems are old and inefficient; electricity supplies are unreliable; generation is highly dependent on Israeli sources; the institutional framework is weak and highly fragmented; and consumption is considerably below regional standards.  In response to these conditions, in 1995 the Palestine National Authority (PA) established the Palestine Energy Authority (PEA) as the sole agency responsible for sector development.  (Decision No. 12 of 1995).  This Letter of Sector Policy (LSP) sets out the PA’s and PEA’s policy for the development of the sector.

Objectives and Strategy

The PEA is committed to providing the citizens of  the Palestinian with reliable electricity supplies, and is committed to doing so at a price that is affordable and that permits the efficient long term development of the sector and the economy as a whole. 

Consistent with the above objectives and given the urgent problems of the sector, priority is being given to: remedying current system deficiencies; improving service delivery and public accountability; and laying the legal, institutional, economic and financial and technical basis for efficient system development.  Thus over the last two years the PEA has undertaken a number of actions, studies and consultations aimed at improving system performance and service delivery, and reforming the institutional framework.  These have been undertaken in conjunction with municipalities, village councils and villages, and with the assistance of the World Bank, Norway and other members of the donor community and villages.

Medium-term Strategy

As a result of these actions and deliberations, the PEA has developed a medium-term (5-7 year) sector development strategy,  the main components of which are:

1.      To focus on rehabilitating existing networks and services and extend services to currently unserved communities;

2.      To separate the ‘policy’ and ‘regulatory’ functions from the ‘commercial functions’ of power sector enterprises;

3.      To refocus and reorganize the PEA to be the main policy making  body for the sector;

4.      To encourage maximum private sector participation in sector operations and development, particularly in generation and distribution, thus minimizing the need for government financial support;

5.      To consolidate transmission networks, systems and functions in the a new transmission company;

6.      To establish three new autonomous and commercially-oriented regional distribution utilities (one in Gaza and two in the West Bank) by consolidating the existing electricity departments of municipalities, village councils and villages;

7.      To increase the operating/technical efficiency of the distribution utility companies through energy end-use efficiency, energy conservation and better load management; and

8.      To develop pragmatic tariff setting guidelines that will permit full cost recovery and promote the commercial viability of sector enterprises while at the same time providing for ‘lifeline’ rates for needy consumers.

Our strategy is guided  by the following core considerations:

·                    While the existing transmission and distribution system is currently weak and fragmented, complete centralization of all components of the system in a single public agency would be inefficient and would militate against efficient long-term system development.  In particular, it would discourage private investment in the sector.

·                    Decentralization and commercialization can yield significant service benefits to consumers, reduce the financial burden on the public sector, encourage private investment and participation in the sector.  “Unbundling” and commercialization/privatization of key parts of the system (particularly generation and distribution) is both feasible and desirable.  Also it is necessary in order to improve service and system quality, and to yield efficiency gains to consumers and the economy as a whole.

·                    Certain functions and parts of the system (particularly policy, system development, and transmission) cannot be efficiently privatized and must thus be retained in the public sector to ‘significant extent.  But for these functions to be efficiently performed they should be disentangled form each other.

While the PEA is fully committed to the strategy outlined in this letter, we propose to act prudently, in close consultation with stakeholders, and with due regard to questions of economic and technical feasibility and strategic national interests.  Thus we propose to implement the reforms in carefully sequenced and calibrated steps over the next two to three years.

Some of the key components of our institutional reform strategy are briefly discussed below and are summarized in the attached table and organogram (Exhibits 1 and 2).

System Rehabilitation

Network upgrading is critical to improving service reliability and efficiency.  Accordingly, since its establishment the PEA has undertaken a number steps to remedy critical network deficiencies.  Among of our first actions was to begin to remedy the most critical defects in the distribution network in Gaza with the assistance the government of Norway.  This program is now being extended to cover the Northern West Bank, and we will shortly extend our efforts to begin to address the most critical deficiencies in the Hebron and central regions, i.e., in the southern West Bank.

Rural Electrification

Electrifying the Palestinian rural areas is a crucial function to develop the a agricultural sector, water supply and other sector in the villages.

Reforming the Institutional Framework

As indicated above, the PEA is convinced that major system reforms are necessary for efficient sector development.  The key areas of reform are: 1) Overall Sector Coordination, Policy Formation, and System Development; 2) Generation; 3) Transmission; 4) Distribution; 5) Tariffs  and Regulation;  7) Government Asset Holding; and 8) Legal Measures To Give Effect To The Proposed Reforms.  Each is briefly discussed below.

Overall Sector Coordination, Policy Formation, and System Development

The PEA will continue to be the sole PA agency responsible for these critical national functions, and will of course lead the reforms.  In doing so, it will divest itself of some of its current functions (see below) and reorganize itself into a professional agency as shown in Exhibits 1 and 2, with offices in both West Bank and Gaza.  The PEA would also continue to be responsible for those components of the sector such as rural electrification, regional inter-connection, energy conservation and research which cannot be realistically or efficiently commercialized. Energy efficiency and conservation will be coordinated with the existing Palestine Energy Center (PEC).  Tariff setting and regulation will be overseen by a separate independent commission reporting to the Palestinian Authority (PA)  as discussed below and shown schematically under Exhibit # 2 .  

Generation

In order to  increase system capacity and reduce supply dependency on Israel, the PEA will encourage the creation of new generating capacity within Palestine.  In doing so, the PEA will encourage maximum participation by the private sector through  independent power providers (IPPs).  In this context the PEA has been promoting private participation in the development of a new generating plant in Gaza with interconnection to the West Bank.  The PEA will also diversify the sources of supply by encouraging the purchases from neighboring countries while at the same time promoting regional interconnection,  system stabilization and scale economies.

Transmission

The transmission network is not yet fully in Palestinian hands.  Also it is a component of the system that can not be  reasonably privatized.  However it needs to be efficiently managed.  To this end the PEA would establish a new, professionally managed and commercially - oriented company, Palestine Energy Transmission Company Ltd. (PETL) which would eventually own, operate and develop the network. Board of PETL  would enter into power-purchase agreements with independent and semi-independent generating companies and from neighboring countries, and would sell power to regional distribution utilities (see below).

Distribution

In order to reduce fragmentation and increase efficiency the existing fragmented distribution system will be consolidated into three new commercially oriented regional utilities, one in Gaza and three in the West Bank (A privately owned utility already serves the Jerusalem region.).  The three new utility (Gaza Region Electricity Utility (GREU), Nablus Electricity Utility (NEU), and Southern  Electricity Company  (SELCo) would be owned jointly by the PEA and the municipalities and village Councils in the respective regions..  The members of the boards of the new companies would be appointed by the respective municipalities, village councils and the PEA.  The new utilities would own the distribution networks, be responsible for service delivery and operations within their regions.   They would of course do so within an overall policy framework established under LSP and as administered by the PEA.  To help establish the new utilities as quickly and a efficiently as possible, the PEA would contract technical assistance services from competent international authorities and utilities for an initial period not expected to exceed 5 years.  While privatization of the utilities is not considered practicable at this stage, provision would be made for significant private participation within 5 years.

Tariffs  and Regulation

In order to help create a “level playing field”  for the private sector participation, tariff setting would be done by a new independent commission, the Palestine Energy Regulation Commission (PERC) reporting to the PA. While the PEA would establish the overall policy for sector development, tariffs would be set by PERC on the basis of commercial considerations with due regard to the needs of especially vulnerable segments of the population.  The members of the Board of PERC would be appointed by the PA on the recommendation of the Board of PEA.  PERC would include significant representation from the private sector.

Government Asset Holding

The PEA will divest itself of many of its existing functions.  However, for reasons outlined above, government will need to retain ownership of significant sector assets.  In order to ensure the efficient management of important national assets, these assets would be vested in a small professionally managed holding company,  Palestine Energy Holdings Ltd. (PEHL).   The members of the Board of PEHL would be appointed by the PA on the recommendation of the Board of PEA.  

Legal Measures To Give Effect To The Proposed Reforms

In order to give effect to the proposed reforms the existing law will need to be amended or a new law passed.  The PEA will take steps over the next few months to draft the necessary legislation and present it to the Palestinian Council for debate and ratification.

Time Table

As noted above, the PEA will act prudently and on a timely basis.  Accordingly, the following time table  is envisaged:

Signed:

              Dr. Abdel Rahman Hamed

              Chairman, PEA

Signed:

              Yasser Arafat

              President, PNA

Exhibit 1:  The Proposed Institutional Framework of the Power Sector