Conflict Escalates Between Israeli Water Authority and Mekorot Over Financial Regulations and Investment Incentives
Tensions have intensified between the Israeli Companies Authority, the Water Authority, and the state-owned Mekorot water company due to a new regulatory accounting method imposed by the Water Authority. This method aims to streamline Mekorot's operations but allegedly forces the company to invest in development projects at a financial loss. The Companies Authority warned that Mekorot might need to record an accounting impairment of 1.95 billion shekels out of just over 3 billion shekels in assets.
At the end of last year, Roee Kahlon, head of the Companies Authority, alerted Energy Minister Eli Cohen that such an impairment could immediately and significantly affect Mekorot's risk perception in capital markets, potentially harming its credit rating, increasing risk premiums, and raising financing costs. This financial weakening could ultimately lead to higher water tariffs and harm the overall water sector.
In March, Mekorot petitioned the High Court of Justice against the Water Authority's decision to change its compensation mechanism. The new system reduces payments for investments in fixed assets like pipelines while increasing rewards for maintenance, efficiency, and profitable activities such as international water consulting. Mekorot expects to record a 1.3 billion shekel impairment due to these changes.
The Water Authority justifies the changes by arguing Mekorot is not a typical traded company since nearly all its revenue is regulated, and that the new rules improve its cash flow and financial strength through debt coverage mechanisms. However, Mekorot's board is reviewing its multi-year investment plan in light of these constraints. The Water Authority has threatened a 7% reduction in cost recognition if Mekorot fails to meet at least 95% of the water sector development plan.
In response, Roee Yaniv Edri, deputy head of the Companies Authority, criticized the Water Authority for interfering with Mekorot's corporate governance and board discretion by imposing sanctions that conflict with the company's financial interests. He described the situation as an "impossible managerial dilemma" where the board risks sanctions if it adjusts investments to cash flow or worsens financial conditions if it continues investing.
Mekorot reported a net profit of 243 million shekels in Q2 2026, up from 62 million shekels the previous year, largely due to accounting gains from lower interest rates. However, the new regulatory framework reduced asset value by 83 million shekels. Despite the Q2 improvement, the first half of 2026 still reflects the impact of regulatory changes enacted at the end of 2025, including a net impairment of about 83 million shekels, following a 1.4 billion shekel impairment in 2025.
