Israel Electric Corp is suing a private Palestinian firm for $150 million in unpaid bills, after negotiations to settle the debt collapsed, officials said on Monday.
The IEC filed suit at the Jerusalem District Court on Thursday against the Jerusalem District Electric Company for a total of 531 million shekels ($153 million), a company statement said.
JDECO is a private company which purchases electricity from Israel to supply to East Jerusalem and cities in the West Bank.
The IEC decided to sue after "intensive contact" with JDECO and Palestinian officials in Ramallah failed to reach a breakthrough.
As well as supplying electricity via JDECO, the Israeli firm also provides power to the Palestinian Authority, which caters to the rest of the West Bank and also supplies power to the Gaza Strip.
The Ramallah-based PA also owes money to the IEC. Both the PA and JDECO ran up debts after failing to collect the full amount they are owed by their own customers.
An energy market insider told AFP that the outstanding debt of the JDECO and PA to the IEC currently stood at 1.5 billion shekels ($434 million) of which around two-thirds was owed by JDECO.
The lawsuit only accounts for around half of that sum.
Israel's finance ministry is offsetting the PA's outstanding debt to the IEC by deducting funds from the monthly taxes it collects on behalf of the Palestinian government.
But in the case of JDECO, Israel has no mechanism for deducting monies, meaning the debt has ballooned, the source told AFP, saying that cutting off the power was not politically feasible.
Until recently, talks were under way to reach a solution, but the Palestinians abruptly halted the negotiations after the signing of a unity deal between the rival leaderships in the West Bank and Gaza, the source said.
Jerusalem District Court is to issue a directive on the case on Wednesday.
Contacted by AFP, Omar Kataneh, head of the Palestinian Power Authority, had no immediate comment on the matter.