c e n t e r f o r e n e r g y p e t r o l e u m a n d m i n e r a l l a w a n d p o l i c y

RESTRUCTURING, PRIVATIZATION, LIBERALIZATION A N D R E G U L A T O R Y R E F O R M O F

TURKISH ELECTRICITY INDUSTRY

I N T E L L E C T U A L / A C A D E M I C R E P O R T

AUTHOR: CUNEYT BODUR ∗

SUPERVISOR: MR. STEPHEN DOW

Telif Hakkı Uyarısı: Bu akademik çalışmanın tüm hakları yazarı Avukat CüneytBodur'e aittir ve yazarı tarafından Türk Hukuk Sitesi (http://www.turkhukuksitesi.com) kütüphanesinde yayınlanmış olup, başka bir yerdeyayınlanması kesinlikle yasaktır.

Bilgilendirme Yazısı: Yüksek Lisans tezi olarak hazırlanmış bu çalışmanınardından Türkiye Elektrik sektöründen elbette bir takım değişiklikler meydanagelmiştir. Eser sektördeki liberalleşme ve özelleşme ile ilgili hala geçerli olantemel bilgiler vermekte ve ülkemizdeki süreçten bahsetmektedir. Bu eserin 13.sayfasındaki üretim oranları bugün itibariyle farklıdır. Sayfa 23 ve 24 yer alandağıtım bölgeleri ve şehirlerin bazılarında da değişiklikler olmuştur. Bu hususlarındışında, eserde sözü edilen sorunlardan büyük çoğunluğu maalesef ki bugünitibariyle de devam etmektedir. İlgililerine yardımcı olması dileklerimle.

* * * * *

Copy Right Warning: this present paper is submitted to Türk Hukuk Sitesi(http://www.turkhukuksitesi.com) by its author Cuneyt Bodur, and this presentweb-site is the only one granted with the permission to publish the paper. Anyand all kinds of publishing on other web-sites are prohibited.

Notification: Turkish Electricity sector has been evolved since the preparation ofthis present master degree report. However, all information regardingliberalization and privatization of the sector in Turkey is still alive and basicinformation on the history and the development of the sector is - of course - stillaccurate. But, please be kindly informed that the proportionate of generation onpage 13 is now different, also some of the cities as well as the distributionareas(page 23 and 24) slightly different now. it is also pity that some of theproblems mentioned in the paper such as competition issue in Turkey is yet to becompletely solved. i wish the paper would be great help to those who are in needof knowledge on the issue.

INDEX

ABBREVIATIONS

1. INTRODUCTION ..………………………………………………………………….…... 1

2. HISTORICAL DEVELOPMENTS OF TURKISH ELECTRICITY INDUSTRY ..... 2

2.1. Early Ages (1902 – 1980) ……………………………………………………...... 2

2.2. Investment Models/Private Participation Models (1980 – 2000) ……………….. 4

2.2.1. Private Participation Models Used in This Term ……………………..... 5

2.2.1.1. Build-Operate-Transfer (BOT) ………………………………. 5

2.2.1.2. Build-Operate (BO) …………………………..……………..... 5

2.2.1.3. Transfer of Operating Rights (TOR) …………………………. 5

2.2.1.4. Autoproduction (APr) ………………………………………... 6

2.2.2. Why Were Private Participations Models Used in This Term? ……...... 6

2.2.3. Another Important Development in This Term …………………….….. 6

2.2.4. Evaluation of this Term ………………………………………………... 7

2.2.5. The Structure of TEI before the EML (Graphic I) ……………………. 7

2.3. Restructuring Electricity Industry/Reform Period (2000 – Present) …………..… 8

2.3.1. Aim and Scope of the Electricity Market Law ………………………… 8

2.3.2. Reasons of the Reform ………………………………………………… 8

2.3.3. Unbundling the Monopoly …………………………………………….. 9

2.3.4. Unbundling the TEI from 1993 to 2004 (Graphic II) ………………... 10

3. WHAT DOES ELECTRICITY MARKET LAW CALL FOR? …………………….. 10

3.1. Restructuring …………………………………………………………………… 10

3.2. Market Design ………………………………………………………………….. 11

3.2.1. Generation and Wholesale ……………………………………………. 12

3.2.1.1. Proportions of Generation Groups (Graphic III) ………….. 13

3.2.2. Transmission ………………………………………………………….. 14

3.2.2.1. What Caused Putting BaSeRe into Force? …………………. 14

3.2.2.2. What Does BaSeRe Call For? ……………………………… 14

3.2.2.2.1. Balancing [Dengeleme] ………...…………….. 15

3.2.2.2.2. Settlement [Uzlaştırma] ………………………. 15

3.2.2.3. How does the BSS work? …………………………………... 15

3.2.2.4. How Are the PPMs Supposed To Be Dealt within the BSS? ...... 17

3.2.3. Distribution and Retail Sale …………………………………………... 17

3.3. Independent Regulatory Agency …...………………………………………….. 17

3.4. New Structure of TEI after EML and SP (Graphic IV) ………………………... 19

4. PRIVATIZATION ……………………………………………………………………… 20

4.1. Privatization and Main Principles ……………………………………………… 20

4.2. Distribution Regions …………………………………………………………… 22

4.2.1. Defining DisRes ……………………………………………………… 22

4.2.2. DisRes of Turkey (Graphic V) ……………………………………….. 24

4.3. An Important Development Affecting DisRes …………………………………. 25

4.4. Why Did the Distribution Take First Place in Privatization? …………………... 25

4.5. How Will the DisCos be Privatized? …………………………………………… 25

4.5.1. Why Has TOR Been Chosen? ………………………………………... 25

4.5.2. The Steps to be Taken During the Privatization Process …………….. 26

4.6. Technical Lose and Theft Problems ……………………………………………. 28

4.7. Tariff Regulations ……………………………………………………………… 29

5. COMPETITION ………………………………………………………………………... 30

5.1. Which Will Prevail, EML or SP? ………………………………………………. 30

5.2. Law 5893 and Vertical Integration ……………………………………………... 31

6. CONCLUSION ………………………………………………………………………….. 33

7. ANNEX – 1 ……………………………………………………………………………… 35

8. BIBLIOGRAPHY ………………………………………………………………………. 36

ABBREVATIONS

APr Autoproduction

BaSeRe Electricity Market Balancing and Settlement Regulation

BO Build-Operate

BOT Build-Operate-Transfer

BSP(s) Balancing System Participant(s)

BSS Balancing and Settlement System

CoM Council of Ministers

CoS Council of State [Supreme Court of Administrative Courts]

DisCo(s) Distribution Company(ies)

DisRe(s) Distribution Region(s)

EML Electricity Market Law

EMRA Energy Market Regulatory Authority

EU European Union

EUAS Electricity Generation Co.

GenCo(s) Generation Company(ies)

HEPP Hydroelectric Power Plant

HPC High Planning Council

IMF International Monetary Fund

MENR Ministry of Energy and Natural Resources

MFSC Market Financial Settlement Center

MP(s) Market Participant(s)

NLDC National Load Dispatch Center

OIZ Organized Industrial Zones

PA Privatization Administration

PEM Price Equalization Mechanism

PPA Power Purchase Agreement

PPMs "Private Participation Models" implies BOT, BO, TOR, and APr models together

RetCo(s) Retail Company(ies)

SHW State Hydraulic Works

SP Electricity Sector Reform and Privatization Strategy Paper

TCA Turkish Competition Authority

TEAS Turkish Electricity Generation Transmission Co.

TEDAS Turkish Electricity Distribution Co.

TEI Turkish Electricity Industry

TEIAS Turkish Electricity Transmission Co.

TEK Turkish Electricity Institution

TETAS Turkish Electricity Trading and Contracting Co.

TOR Transfer of Operating Rights

WB World Bank

1. INTRODUCTION

In the 1990s, there was a worldwide push towards reforming the utility industries and

monopolistic business structures, most notably in the electricity industry. The main aim of

the reforms was to improve economic efficiency. The means by which this was to be

achieved was the introduction of competition.1 To create a competitive electricity market,

where not existed before, requires any country to implement a wide range of structural and

regulatory reforms.2

Until the end of the twentieth century, few countries questioned the economic efficiency of

state-owned and vertically integrated utilities and their role as monopoly service providers

in the electricity industry. In 1990 the UK opted to move to a new industry structure

involving full competition in generation and retail segments. This was achieved by

unbundling the industry structure and making transmission and distribution common

carriers.3

On the other hand, Republic of Turkey (Turkey), with a young and growing population,

low per capita electricity consumption, rapid urbanization and generally strong economic

growth, for nearly two decades has been one of the fastest growing power markets in the

world. The government anticipates the need for significant increases in power generating

capacity in coming years, possibly 54,000 MW by 2020, requiring billions of dollars

investment.4 As insufficiency of public funds and poor performance of public electricity

monopoly taken into consideration as well as the advices given from international

institutions such as World Bank (WB) and International Monetary Fund (IMF), Turkey

passed the long-anticipated Electricity Market Law (EML)5, in 2001, which envisages the

establishment of a competitive electricity market and to promote private participation in

the industry.

1 Pritchard, R., Eight Guidelines of Electricity Industry Reform, Vol. 12-7 Article. Online Journal CEPMLP

(August 2002) at www.dundee.ac.uk/cepmlp/journal/html/volume12.php (last visited on 10 August 2006). 2 Id. 3 Pritchard, R., Andrews-Speed, P., Eight Principles of Electricity Industry Reform, Vol. 7-2 Article. Online

Journal CEPMLP (July 2000) www.dundee.ac.uk/cepmlp/journal/html/volume7.php (last visited on 10 August 2006).

4 International Energy Agency, Turkey Country Analysis Brief (June 2005), at www.eia.doe.gov/emeu/cabs/ turkey.html (last visited on 7 August 2006).

5 Turkish Electricity Market Law, Law No. 4628, (entered into force March 2001).

1

This present paper examines regulatory reform, privatization and liberalization of the

Turkish Electricity Industry (TEI). It firstly delivers information about the historical

development of TEI and the investment models used therein, then mentions the reform

process which includes restructuring the industry, new market design and privatization of

distribution segments as well as the general competition issues arising from the

liberalization of the industry. All these issues are examined within the frame of deductive

methodology. The paper concludes that even Turkey has moved forward a lot since the

enactment of EML, Turkey has still a long way to take and lots to learn due to there are

still important issues waiting to be addressed or to be settled between concerned state and

private parties of the process.

2. HISTORICAL DEVELOPMENTS OF TURKISH ELECTRICITY INDUSTRY

2.1. Early Ages (1902 – 1980)

In Ottoman Empire, the first electric generator was a 2 kW dynamo connected to the water

mill installed in Tarsus in 1902. This enterprise belonged to a private sector participant.6

Electricity energy activities had been operated by foreigners in Ottoman Empire by way of

obtaining respective concessions.7 Electrification of Istanbul, for the first time, had been

conducted by Macar Ganz Corp. on 1st of October 1910. This company was authorized on

electricity generation and sales.8 The first bigger power plant was installed in Silahtarağa

region of Istanbul, in 1913.9

Turkey was founded on 29th of October 1923 as a successor country of Ottoman Empire.

Turkey was trying a liberal economy between 1923 and 1930s and the electricity sector

was heavily dependent on foreign investment, mostly German, Belgium, Italian and

Hungarian Companies.10 The first Turkish electricity company, Kayseri ve Civarı

6 Hepbaslı, A., Development and Restructuring of Turkey’s Electricity Sector: a Review, Renewable and

Sustainable Energy Reviews 9 (2005), at 311-343. See Also, Kulali, I., Electricity Sector and Privatization studies in Turkey, at http://ekutup.dpt.gov.tr/kit/kulalii/elektrik.html (last visited on 7 August 2006) in Turkish.

7 State Auditing Agency, Research Report With Respect to applications of BOT and TOR, at www.tccb.gov. tr/tr_html/DDK/enerji.htm (last visited on 07 August 2006) in Turkish.

8 BEDAS, History of Electricity in Istanbul, at http://www.bedas.gov.tr/bedas/tarihce.php (last visited on 07 August 2006) in Turkish.

9 See, Supra n6 10 Id.

2

Electricity Corp., was established in 1926. At the end of this era, there were 48 power

plants (74.8 MW). 11

In 1930s, there was a widespread belief all over the world in the benefits of public

ownership of the electricity industry.12 Following to this trend “Statism” policies

dominated the Turkish economy. Hence, all activities and companies in Electricity

industry, except Kayseri ve Civarı Electricity Corp., were nationalized in 1938 as per the

provisions of Law 3480.13 This was followed by a legislation that allowed the municipals

to build and operate power plants. In 1935, Etibank, Mineral Research and Exploration

Institution, and Electrical Power Resources Survey Administration were founded, later the

Bank of Provinces [İller Bankası] and State Hydraulic Works (SHW) [Devlet Su İşleri]

were established. The installed capacity had reached 126.2 MW by 1950.14 There was a

diffused and de-centralized structure in this period of TEI.15

In 1953, 1st Energy Consultation Congress [1. Enerji İstişare Kongresi] was conducted for

the purpose of preventing diffusing and providing a centralized structure to industry. The

two most important decisions taken in this congress were;

To build big and powerful hydraulic and thermal power stations in lieu of small and

local diesel stations.

To transfer electrification activities carried out by various institutions to one central

and state owned electricity institution. 16

In 1960, the government started the “development plans era” which was more of a national

policy than a global one. The Ministry of Energy and Natural Resources (MENR) [Enerji

ve Tabii Kaynaklar Bakanlığı] was established in December 1963, and was responsible of

Turkey’s energy policy.17 This was followed by the creation of Turkish Electricity

Institution (TEK) [Türkiye Elektrik Kurumu] by Law 1312 on 15th July 1970 (barely, 17

11 Id. 12 Erdogdu, E., Regulatory Reform in Turkish Energy Industry: An analysis, Energy Policy Journal, article in

press, at doi:10.1016/j.enpol.2006.02.011 (last visited on 07 August 2006). 13 See, Supra n8 14 See, Supra n6 15 See, Supra n7 16 Id. 17 See, Supra n6

3

years later than the 1st Energy Consultation Congress).18 TEK had a monopoly in Turkish

electricity sector at almost all stages apart from distribution, which was left to the local

administrations such as municipalities and the Bank of Provinces.

However, distribution was also transferred to TEK as per provisions of Law 2705 in 1982,

thus TEK became a vertically integrated, state-owned monopoly.19 The only exemption in

these transfer transactions was hydroelectric generators, which had been constructed and

operated by Directorate General of SHW.20 Installed capacity reached 2,234.9 MW by

1980.21

2.2. Investment Models/Private Participation Models (1980 – 2000)

In the early of 1980’s, like many European countries, TEI was dominated by a vertically

integrated and state-owned monopoly. Starting from 1980s, Turkey sought to attract

private participation into the industry.22 The reasons behind this disposition can be

summarized as fallows;

In 1980, Turgut Özal who was a liberal economy supporter won the elections,

became the Prime Minister and initiated his liberalization policies.

Insufficiency of public funds,

Poor performance of public electricity monopoly23

Improve the efficiency of electricity sector.

Rapid urbanization, young population, and growing electricity consumption

18 See, Supra n7 19 See, Supra n12 20 Ozkıvrak, O., Electricity Restructuring in Turkey, Energy Policy Journal 33 (2005), at 1339-1350. 21 See, Supra n6 22 Bodur, C., Regulatory Framework of Build-Operate-Transfer Model in Turkey, presented Research Paper

for International Project Finance course at CEPMLP, April 2006. 23 In 2000, the losses of TEAS reached 656 million USD (See, Supra n20). This amount derived from the

unpaid amount of the electricity that bought by TEDAŞ. TEDAS was not able to pay the price of the electricity due to it had difficulty in collecting fees from, particularly, public utilities such as municipalities. Even, as of 2006 this amount is decreasing, there is important problem in terms of revenue stream between state-owned institutions. Source: www.ntvmsnbc.com/news/382356.asp (last visited at 07 August 2006) in Turkish.

4

2.2.1. Private Participation Models Used in This Term

2.2.1.1. Build-Operate-Transfer (BOT)

The first codification with respect to BOT was made in energy sector in 1984. The Law

3096 changed the monopolistic structure of TEK and provided scope to private sector – for

the first time since 1930s – to conduct commercial activities in generation, transmission,

distribution and trade of electrical energy.24 Four Bylaws were later issued to clarify the

application of this law. Here are the associated Bylaws; 85/9759, 85/9800, 87/11488, and

91/1630.

In 1990s financial strains also increased for public infrastructure investments due to lack of

funds. Therefore, there was a need of a codification which would regulate (unify) BOT

models in every sector in economy, a general BOT law. Consequently, Law 3996 which

regulates BOT model as general was enacted in 13th of June 1994. Afterwards, Bylaw

94/5907 was published on October 1994 to clarify the application of this law.25

2.2.1.2. Build-Operate (BO)

Law 4283, for private sector participation in construction and operation of new power

plants was also enacted in 1997 and treasury guarantees provided as it had happened in

BOT model.26 Bylaw 97/9853 was later issued to clarify the application of this law.

2.2.1.3. Transfer of Operating Rights (TOR)

Law 3096 also covered Transfer of Operating Rights (TOR) of existing power plants and

transmission and distribution facilities owned by the state (article 5) to the private

enterprises.27 Council of Ministers (CoM) [Bakanlar Kurulu] had authority on TOR as per

the provisions of Bylaw 87/11488.

24 See, Supra n22 25 See, Supra n22 26 See, Supra n12 27 See, Supra n22

5

2.2.1.4. Autoproduction (APr)

In 1984, following the enactment of Law 3096, autoproduction in Turkey picked up at a

fast pace. “Autoproducers” are those entities that essentially generate electricity for their

own and their shareholders’ use. The major underlying reason for the fast spread of

autoproduction is no doubt reliability and cost concerns of the industrial sector. Increased

thermal efficiency in cogeneration technologies and the possibility of selling surplus

energy to the national grid continues to make these investments more attractive. Currently,

industrial plants with cogeneration units can achieve savings of up to 50 percent on their

energy bills as compared to the cost of grid power in Turkey.28

2.2.2. Why Were Private Participation Models Used in This Term?

First of all, Turkey didn’t have any idea of privatization of electricity industry due to

electricity industry reform, or opening the industry into competition, was not as widely

spread all over the world as it is now.

Secondly, the main reason why Turkey opted to try to attract private investment to the

sector which was regarded as a “public service” was insufficiency of public funds. Also,

had Turkey intended to privatize the electricity, it would have faced with enormous legal

problems due to electricity had been deemed as “Public Service” that had to be carried out

by state under the Turkish Constitution. One of the exemptions to this maxim was

concession. Hence, Turkey tried to use the concession methods to realize those capital

intensive investments.

2.2.3. Another Important Development in This Term

In 1993, TEK was split into two separate state institutions: Turkish Electricity Generation

Transmission Co. (TEAS) and Turkish Electricity Distribution Co. (TEDAS) by the

Decree of CoM (Dec. no: 93/4789). The reasoning of this Decree was to provide more

28 Directly taken from the work: Serhat Guney, E., Restructuring, Competition, and Regulation in the Turkish

Electricity Industry (Istanbul: Turkey, Tepav Publication, 2005).

6

efficient and more effective services to industry and to incorporate TEK into privatization

plan.29

2.2.4. Evaluation of This Term

BOT, BO, and TOR contracts which were concluded between private sector participants

and the administration (TEAŞ and TEDAŞ), stipulated “take or pay” obligations with fixed

quantities (in general, 85% of plants’ output).30 Under these models, the government

retains most commercial risks. In Turkish case; there was no requirement for a competitive

tender process, particularly as per Law 3096, to conclude these contracts which resulted,

for sure, in high electricity prices.31

Most of the commentators criticize these Private Participation Models (PPMs) and regard

them as major barriers to development of the competitive electricity sector due to there are

some privileged companies who have hedge and don’t bear the commercial risk, whereas

all participants are to be equal in any market asserting to be a competitive one.

2.2.5. Structure of TEI before the EML (Graphic I)

The below given graphic is taken from the article “The Politics of Regulation in the Turkish Electricity Market”32 and modified by the author.

29 Turkish Electricity Distribution Co. (official web site), History of the Institution, at http://www.tedas.gov.

tr/1,Hakkimizda.html (last visited on 07 August 2006) in Turkish. 30 See, Supra n7 31 See, Supra n12 32 Cetin, T., Oguz, F., The Politics of Regulation in the Turkish Electricity Market, Energy Policy Journal,

article in press, at doi:10.1016/j.enpol.2006.05.014 (last visited on 07 August 2006).

7

2.3. Restructuring Electricity Industry/Reform Period (2000 – Present)

2.3.1. Aim and Scope of Electricity Market Law

Turkish Electricity Market Law (EML), Law 4628, was enacted in 2001. The main

objective of Law, as stated in Article 1, is “to ensure the development of a financially

stable and transparent electricity market operating in a competitive environment under

provisions of civil law and the delivery of sufficient, good quality, low cost and

environment-friendly electricity to consumers and to ensure the autonomous regulation

and supervision of this market.”33

This law covers generation, transmission, distribution, wholesale, retail and related

services of electricity; rights and responsibilities of all real persons and legal entities

involved with those activities and establishment of a independent regulatory authority and

determination of operating principles of this authority; and the methods to be employed for

privatization of electricity generation and distribution assets.34

2.3.2. Reasons of the Reform

The reasons and/or problems (in addition to the ones mentioned in section 2.2.) that

initiated the reform process in TEI can be summarized as fallows;

The MENR has planned for a very large increase in electric generating capacity

over the next 20 years. According to forecasts prepared by the MENR, the country

will need about an electric power capacity of 65 GW by 2010, and about 105 GW

by 2020. Electric energy generation capacity is expected to have to rise from about

117 TW h in 2001 to more than 347 and 624 TW h in 2010 and 2020, respectively.

This implies power demand growth rates of at least 8% per annum35 for the coming

decade and at least 6% per annum for the following decade.36

33 Article 1 of EML 34 Article 1/paragraph II of EML 35 Indeed electricity consumption increased 8.46 % in Turkey this year. Source: www.enerjiforumu.com/

gazete/?ID=2050 (last visited on 25 August 2006) in Turkish. 36 See, Supra n6

8

Decreasing the technical losses in distribution segment to the level in OECD

countries and prevention of theft (illegal use of electricity)37.

Realization of reform has been underlined by the international financial institutions

such as IMF and WB that have supported Turkey through the economic crises

under Stand-by arrangements,38

Reform has also paralleled the Turkey’s longer term objectives of accession into

European Union (EU) and has needed to approximate laws to EU acquis,

consequently which requires progressive liberalization of electricity market. 39

Transferring to consumers the benefits obtained through competition in generation,

trade of electricity, and regulation of quality of service.40

2.3.3. Unbundling the Monopoly

To satisfy the provisions of EML, TEAS was unbundled, by Decree of CoM (Dec. no

2001/2026 dated 5th of February 2001), into three state-owned public enterprises, namely

Electricity Generation Co. (EUAS), Turkish Electricity Transmission Co. (TEIAS), and

Turkish Electricity Trading and Contracting Co. (TETAS).41

37 High Planning Council, Electricity Sector Reform and Privatization Strategy, at www.oib.gov.tr/program/

2004_program/2004_electricity_strategy_paper.htm (last visited on 7 August 2006). 38 See, Supra n20 39 Id. 40 See, Supra n37 41 Turkish Electricity Trading and Contracting Co. (official web site), at www.tetas.gov.tr/tanitimson.htm

(last visited on 7 August 2006) in Turkish.

9

2.3.4. Unbundling the TEI from 1993 to 2004 (Graphic II)

Illustration is made by the author and the graphic artist, Nurettin Gumusbas.

3. WHAT DOES ELECTRICITY MARKET LAW CALL FOR?

EML was designed to establish a competitive electricity market, to promote private

participation and improve efficiency in industry.42 The key features of EML are as fallows;

3.1. Restructuring

As explained above, TEAS has been further unbundled into EUAS (generation), TETAS

(wholesale) and TEIAS (transmission). Each of them has been formed as a separate state-

owned legal entity.

42 See, Supra n20

10

Under the new structure;

EUAS takes over existing public power plants that have not been transferred to

private sector.43 Same article also stipulates EUAS to take over the Hydroelectric

Power Plants (HEPP) which are currently under the possession of SHW. According

to the studies conducted by SHW, EUAS and Advisory of State Treasury, 9 billion

USD has been defined for transferring 31 HEPP to EUAS.44

TETAS is formed to carry out wholesale operations and it seems that it will

dominate wholesale market in the near future45, because the privatization in

generation segment will be conducted after successful privatization of distribution

segment.46 TETAS, also becomes the holder of all previously concluded BO, BOT

and TOR contracts, including long-term PPA with treasury guarantees, and will

assume other stranded costs.47

TEIAS is responsible for transmission which remains under the ownership of state

and also has the capacity of “System Operator” and “Market Operator” as well

under the Electricity Market Balancing and Settlement Regulation.

TEDAS has been divided into 21 distribution region as per strategy paper issued by

High Planning Council (HPC) [Yüksek Planlama Kurulu]. Further information

regarding TEDAS is provided below in section 4.2. and ongoing sections.

3.2. Market Design

At the heart of new structure, bilateral contracts48 market where generation companies

(GenCos) contract with wholesale trade companies, distribution companies (DisCos), retail

companies (RetCos) and eligible consumers. The current market design does not envisage

a pool or power exchange. The equality of demand and supply, given the bilateral

contracts, is to be carried out by the System Operator (TEIAS) through purchases and sales

43 Article 2/a.1 of EML. Also See, Supra n37 44 Source: http://www.enerjiforumu.com/gazete/?ID=2047 (last visited on 24 August 2006) in Turkish. 45 See, Supra n12 46 See, Supra n37 47 See, Supra n12. Also, see Article 2/d.1 of EML 48 Bilateral contracts are the agreements whose terms and conditions are freely determined by parties and

subject to private law. Source: Energy Market Regulatory Authority, Electricity Market Implementation Manual (April 2003), at http://www.epdk.org.tr/english/reports/electricity.htm (last visited on 7 August 2006).

11

in a balancing market.49 In order to realize this task, National Load Dispatch Center has

been established within TEIAS.

3.2.1. Generation and Wholesale

The state has a controlling power in the generation by EUAS. The share of state-owned

generators is % 45,40.50 (The graphic displaying proportions among different generation

groups added below as section 3.2.1.1.) In addition, according to the “existing contracts”51

the state through TETAS(wholesale company) have to purchase almost all electricity

generated by the private companies involved in PPMs.52 As explained earlier in this paper,

these models were granted Treasury Guarantees, therefore TETAS has to buy and market

the electricity generated by the above-mentioned models until the “existing contracts”

expire.

It seems that the dominant position of state in generation and its monopoly in wholesale

will continue, at least, for the coming five years due to the “existing contracts”. Also,

investors have not invested to industry due to, most probably, uncertainties on industry.

Therefore, it is easy to conclude that the state will continue to be the determinative investor

of the industry in near future. As it is stated by many scholars, existing contracts negatively

affect new entrants because of privileged trading relationships and non-competitive

pricing.

The two main reasons behind high electricity prices generated by PPMs are,

They are mostly natural gas fired power plants. Hence, the initial investment cost

respectively low but the cost of electricity generation is high as compared to other

investment models such as HEPP, or lignite fired power plants, etc.

There was no requirement for prequalification or even for a competitive open

tender process to conclude the contracts. They were mostly signed through a

negotiation processes which the state was incompetent.

49 See, Supra n12 50 Energy Market Regulatory Authority (official web site), Annual Report (2005), at www.epdk.gov.tr/yayin_

rapor/yillik/yillik .htm (last visited on 7 August 2006). 51 Existing contracts are the contracts and concession agreements and implementation agreements concluded

between the private companies and the government prior to enactment of EML 2001 in accordance with the investment models such as BOT, BO and TOR. (Article 1 of EML).

52 See, Supra n20

12

The method opted by Turkey to overcome this high electricity price is to blend low cost

generation which includes HEPP generation with the PPMs’ electricity. This operation is

conducted by TETAS. It purchases low cost electricity from state-owned generators and

high cost electricity from private generators and blend them (in terms of their cost) and

sells to market.

In order to form a competitive wholesale market, TETAS is expected to loose its

controlling power over the coming years particularly at the end of the term of these

contracts. On the other hand, EML envisages some restrictions, in order to assure

competition, on future private wholesale companies such as the related companies are to be

legally restricted to a market share of 10% of the total electricity consumed in the market

in preceding year.53

Also some restrictions have been set out on private generation companies in order to

prevent concentration which may lead to market power in the segment. E.g. total market

share of a particular private generation company and its affiliates can not exceed 20% of

the published figure of for the total installed capacity in Turkey in the preceding year.54

3.2.1.1. Proportions of Generation Groups (Graphic III)

The data used in this graphic were taken from EMRA’s 2005 Report.55 Illustration is made by the author.

45,40%

25,80%

10,60%8,50%

6,50%2,50%

0,50%0,00%5,00%

10,00%15,00%20,00%25,00%30,00%35,00%40,00%45,00%50,00%

State G

ener

ators

BO Mod

el

A.Pr & A.Pr G

roups

BOT Mod

el

Gen. L

icence

Holders

TOR Mod

el

Mobile

Gen

erator

s

53 Article 2/d.2 of EML 54 See, Supra n20 55 See, Supra n50

13

3.2.2. Transmission

EML defines transmission as “the transport of electricity through lines higher than 36

kV”.56 In the new structure, transmission remains under state ownership57. TEIAS takes

over transmission assets, plans new transmission investments and build new transmission

facilities.58 It is known that, transmission system is principally governed by a central

administration due to technical features of transmission rather than economic concerns. 59

Also, in the bilateral contracting model which adopted by Turkey, TEIAS has important

roles in the market both as a “system operator” and a “market operator”. These tasks are to

be carried out as per provisions of both EML and Electricity Market Balancing and

Settlement Regulation60 (BaSeRe) [Dengeleme ve Uzlaştırma Yönetmeliği]. Even this

regulation was enacted in 2004, it was not in use as de facto until 1st of August 2006. Until

this date, the system worked on fix prices for loading and de-loading of electricity.

3.2.2.1. What Caused Putting BaSeRe into Force?

What caused putting BaSeRe into force is that Turkey has faced electricity interruption on

1st of July 2006 and 13 cities including third biggest city of Turkey, Izmir, buried into

darkness at weekend.61 This event triggered big debates about PPMs particularly about

autoproducers who did not load electricity on the ground that they lose money due to low

electricity prices and high cost such as natural gas price. Minister of Energy and Natural

Resources, Mr. Hilmi Güler, stated that there is no shortage problem in Turkey (as of

today, Turkey has over 15% additional generation capacity) but a tariff problem.62 As a

result of this development BaSeRe has been put into force on 1st of August 2006.

3.2.2.2. What Does BaSeRe Call For?

BaSeRe envisages a “Balancing and Settlement System” (BSS). BSS is defined as a

“system that consists of activities related with real-time balancing the demand and supply

56 Article 1/12 of EML 57 Article 2/b, and Article 3/c.2 of EML 58 Article 2/b of EML 59 See, Supra n20 60 Official Gazette dated 03/11/2004, no 25632 61 Source: www.ntvmsnbc.com/news/381273.asp (last visited on 7 August 2006) in Turkish. 62 Source: http://www.zaman.com.tr/?bl=sondakika&alt=&trh=20060706&hn=301878 (last visited on 7

August 2006) in Turkish.

14

through acceptance of bids and offers, financial settlement of payables and receivables

arising from energy supplied to or withdrawn from the system, parties engaged in these

activities and relations among the parties” under the article 1 of BaSeRe. Minister Mr.

Güler stated that balancing and settlement mechanism was the brain of the electricity

system. There are two different tasks carried out by the BSS. Such as;

3.2.2.2.1. Balancing [Dengeleme]

Balancing equalizes the system supply and demand of active electricity energy on real

time. This task is carried out by the unit under the body of TEIAS named as “National

Load Dispatch Center (NLDC) [Milli Yük Tevzii Merkezi]. 63 This center is also named

(authorized) as “system operator”.64 The aim of the Balancing is to ensure supply of

sufficient and good quality energy with low-cost in a continuous manner.

3.2.2.2.2. Settlement [Uzlaştırma]

Settlement calculates amounts payable or receivable by legal entities operating in the

market, based on differences between actual purchases and sales as a result of the real time

physical balancing of energy supply and demand by NLDC, in accordance with the

provisions of the relevant legislation. This task is carried out by the unit under the body of

TEIAS named as “Market Financial Settlement Center (MFSC) [Piyasa Mali Uzlaştırma

Merkezi]. 65 This center is also named (authorized) as “market operator”. The aim of the

Settlement is to establish financially sound, stable and transparent electricity market

operating in a competitive environment under provisions of civil law.

3.2.2.3. How Does the BSS Work?

First of all, we had better if we mention who the market participants (MP) and balancing

system participants (BSP) are. Under article 10 of BaSeRe; MPs shall consist of licensed

legal entities that supply energy to the system or withdrawn energy from the system

63 Article 4 of BaSeRe 64 Article 14 of BaSeRe 65 Article 4 of BaSeRe

15

through participating in the balancing mechanism and/or their short and/or long energy

positions. The market participants shall consist of the following:

a) Generation licensees,

b) Autoproducer licensees,

c) Autoproducer group licensees,

d) Wholesale licensees,

e) Retail licensees.

Under the article 12 of BaSeRe, BSP shall consist of licensees engaged in generation

activity. A MP shall have at least one balancing system entity66 registered to its name in

order to be a BSP.

Secondly, as we mentioned previously in this paper, EML envisages a bilateral contracting

market design. Hence, MPs conclude agreements that subject to civil law, and MPs are

obliged to notify MFSC about their sell and purchase agreements. This notification is

vitally important not only in terms of Settlement but Balancing as well. Because, no matter

how sensitive an estimate is made in the beginning, the supply-demand balance foreseen in

the bilateral contract may be disrupted due to changing conditions and unforeseen

situations concerning either side.67 In this case, the system operator (NLDC) shall ensure

the final physical balance by making giving orders to generators to load or de-load, based

on bids and offers submitted by generators. The market operator (MFRC) charges market

participants for the balancing and settlement costs they caused.68

Until the balancing and settlement mechanism becomes fully operational, those bilateral

contracts to which state-owned entities are a party will be subject to regulation, in order to

enable market participants gain experience in carrying out bilateral contracts and ensure

that they will not be subject to excessive extra costs arising from system imbalance.69

66 Balancing System Entity “Generation facility or part of the generation facility eligible to participate in the

balancing mechanism.” (Article 4 of BaSeRe). 67 See, Supra n50 68 Id. 69 Id.

16

3.2.2.4. How Are the PPMs Supposed To Be Dealt within the BSS?

Under the provisional article 1 of BaSeRe, The generation companies, that are currently

selling electricity to TETAS within the framework of BO, BOT and TOR contracts, shall

be registered with the MFSC by TETAS under TETAS account.

TETAS shall bear all rights and liabilities arising from all transactions as indicated in this

Regulation regarding submission of physical notifications, associated data and bids-offers

for such balancing system entities and their participation in the balancing system.70

3.2.3. Distribution and Retail Sale

These issues are examined comprehensively below in Section 4 (Privatization).

3.3. Independent Regulatory Agency

To ensure transparency and independent regulation over the sector, administratively

independent and financially autonomous “Electricity Market Regulatory Authority” had

been established as per EML and it was later renamed as “Energy Market Regulatory

Authority” (EMRA) [Enerji Piyasası Düzenleme Kurumu] as per the provisions of Natural

Gas Market Law no. 4646. With the enactment of the Petroleum Market Law no.5015 and

Liquefied Petroleum Gas (LPG) Market Law no. 5307, the Authority has been

commissioned to regulate and supervise the petroleum and LPG markets as well. Members

of the Energy Market Regulatory Board assumed duty on November 19, 2001.71

In the new structure, the state has an active role in transmission and in balancing and

settlement mechanism. But, in the competitive segments, generation and trading of

electricity, the state role and authority vested in EMRA. With the establishment of EMRA,

the role of the MENR is focused on the establishment and enforcement of general energy

policies, privatization proposals, determining import and export policies and the promotion

of supply security.72

70 Provisional Article 1 of BaSeRe 71 EMRA (official web site), at www.epdk.gov.tr/english/default.asp (last visited on 7 August 2006). 72 See, Supra n20

17

The main functions of EMRA;

Granting Licenses and Determining Provisions Therein.73All participants engaging

in electricity activities are required to obtain related licenses. The terms and

conditions such as prices, cancellation, renewals and dispute settlements of these

licenses are defined in detail by EMRA.

Approving Secondary Legislation. EMRA approves Grid Regulation, Distribution

regulation, Customer Services Regulation, and BaSeRe.74

Determining eligible customers over time.75 Eligible consumers are any real person

or legal entity that has the liberty to choose its supplier (may choose from a

distribution, retail sale or wholesale company or directly from generation

company), due to its consumption of more electricity than the amount defined by

EMRA or its direct connection to the transmission system76 (The limit for eligible

consumers is defined as 6 million kW/h by EMRA on 25th of January 2006.)77 On

the other hand, non-eligible consumers have to purchase electricity from the

distribution or the retail sale companies operating in that region at the price

determined by EMRA.

Preparing Respective Tariffs.78 Some of the tariffs that are prepared by EMRA are

as follows; the connection and use of system tariff, transmission tariff, wholesale

price tariff, distribution tariff, and retail tariff.

Overseeing the performance of market participants.79 To oversee (audit) the

activities and practices of legal entities operating in the market, as well as their

compliance with the terms and conditions of their respective licenses, in order to

ensure compliance with non-discrimination and transparency standards.

Protecting customer rights.

Imposing sanctions to parties that not complying with their obligations under applicable legislation or respective licenses.80

73 Article 5 of EML 74 Article 5/II.a of EML 75 Article 5/b of EML 76 Article 1 of EML 77 EMRA Decision dated 25/01/2006 (Decision no 641) in Turkish. 78 Article 13 of EML 79 Article 5/i of EML 80 Article 11 of EML

18

As it has mentioned earlier, EMRA has administrative and financial autonomy. It earns its

revenues principally from licensing fees. Under current framework, any lawsuit against

decision delivered by EMRA may be appealed to Council of State (CoS) [Danıştay].

3.4. New Structure of TEI after EML and SP (Graphic IV) Even the below presented graphic is illustrated in accordance with the applicable legislation, it is under the copyright of the author and the graphic artist due to its distinctive design and configuration, also to the best of the author’s knowledge there are several graphics in literature which try to depict the structure, however they are not similar at all with the one given below.

19

4. PRIVATIZATION

4.1. Privatization and Main Principles

EML envisages privatization both in generation and in distribution segments, and

liberalization in every segment of the industry except transmission which remains under

state ownership. Under the 14th article of EML, MENR notifies to the Privatization

Administration (PA) [Özelleştirme İdaresi Başkanlığı] the proposals and opinions

regarding the privatization of the assets belonging to the TEDAS, EUAS, and their

subsidiaries, affiliates, partnerships and operational units and facilities. The privatization

process is executed by the PA as per the provisions of Privatization Law 404681.

On 17th of March 2004, High Planning Council (HPC)82 [Yüksek Planlama Kurulu] issued

the Strategy Paper (SP)83 regarding electricity industry reform and privatization. SP

outlines the major steps to be taken in order to realize considered privatization. According

to SP, privatization was supposed to start in distribution sector and all Distribution Regions

(DisRes) were expected to be privatized until the end of 200684. As of today, there is no

DisRe privatized but at least one of them is to be opened to bids until the end of this year.

Also some public procurement provisions which released to the newspapers are mentioned

below.

Under SP, the basic principles of Privatization are as follow;85

The privatization activities will be performed by the PA within the framework of the

provisions of Law 4046. This provision is exactly the same with the one in EML.

The privatization approach will not be solely aimed at the maximization of

privatization income. Despite the fact of this principle, the privatization of

Distribution will be realized without unbundling from Retail if any changes not

made in days to come.

81 Enacted on 27 November 1994 and published in Official Gazette dated 27/11/1994. 82 HPC is composed of Prime Minister, Ministers and Advisor of State Planning Organization. 83 HPC, Decree No: 2004/3, “Electricity Sector Reform and Privatization Strategy Paper”, See Supra n37 84 See, Supra n37 85 Taken from SP and comments added by the author.

20

There will be utmost efforts to ensure that the privatization does not lead to

permanent increases in electricity prices. Hence, EMRA is to regulate the terms

and conditions of transition term tariffs that will be in force after the first five years

of privatization.

The participation of financially strong companies able to achieve the objectives

and principles of the program will be encouraged in the privatization process. This

principle is being criticized a lot by most of the commentators, particularly by the

left wing supporters, due to this principle provide vital advantages to giant foreign

companies such as RWE, E-ON etc. As we mentioned before, some provisions of

public procurement which have been defined by PA have been released to public as

of August 2006, such as86;

• Technical Sufficiency; 1) The Company has to be conducting power sales

equivalent to aggregated amount of sold electricity in a year in that DisRe

for at least 3 years in order to meet this provision. 2) The Company has to

be carrying out distribution services, for at least three years, to the

customers whose population equivalent or larger then the respective DisRe.

• Capital Sufficiency; 1) Equity [Öz Sermaye] – Book Value [Defter Değeri]

Ratio may be no less than 65% which means the bidder has to prove that its

equity equals or excesses the 65% of Book Value of assets to be privatized.

2) Fixed Assets [Sabit Değerler] – Book Value Ratio may be no less than

50% which means the fixed assets of the bidder has to be equal to 50% of

Book Value of the assets to be privatized.

A competitive generation structure will be achieved through appropriately

grouping generation assets, like portfolio companies, (disaggregation) prior to their

privatization. As of today, there are six portfolio generation companies whose

installed capacities are almost equal to each other. This provision is also important

in terms of introducing competition into generation segment of the industry.

The privatization approach will take into account existing public liabilities and will

not lead to additional State guarantees. This provision can be regarded as the

reflection of the provision of EML which prohibits granting treasury guarantees in

TEI. 86 Source: http://www.enerjiforumu.com/gazete/?ID=2044 (last visited on 7 August 2006) in Turkish.

21

4.2. Distribution Regions

4.2.1. Defining DisRes

As a consequent of EML and SP, TEDAS87 have been taken into privatization portfolio of

PA by the decision of Privatization High Council on 2nd of May 200488. As we mentioned

earlier in this paper, 21 DisRes have been defined within Turkey. Under SP the reason and

the aim taken into consideration while defining the regions are; “with due regard to the

operational problems as a result of the geographical structure, the size of the region as

compared to energy purchased and technical/financial characteristics, the “existing

contracts”, and the current legal process in Turkey, the number of distribution regions

have been determined at most 21 throughout the country”89 All DisRes, except Kayseri ve

Civarı Electricity Corp. which continues to hold concession since the early ages of Turkey,

are to be privatized. Before presenting the DisRes, we, here, want to mention that WB

criticizes the number of DisRes. WB thinks the number of DisRes excessive.

Here is the diagram of DisRes that encloses associated information.

DisRes’ numbers and names of provinces taken directly from the Turkish version

of SP at page 8).

Aggregated technical lose and theft ratio of the regions and the names of DisCos

also added to the below table by the author.

• The technical lose and theft date used here taken from the Atıyas work90

and belongs to 2004. They are provided as aggregated because the precise

ratio of technical lose has not been determined.

• DisCos’ names were taken from the document bears the opinion delivered

by Turkish Competition Authority (TCA) [Rekabet Kurumu] on 21 July

2005.

87 Number of Employees; 31,950 (as of March 2005), Capital Share Holding: 1,050,000,000 New Turkish

Liras (app. 384,000,000 GBP). Source: Privatization Administration (official web site), at www.oib.gov.tr/ portfoy/tedas_eng.htm (last visited on 22 August 2006).

88 Privatization High Council (Decree No: 2004/22) in Turkish. 89 See, Supra n37 90 Atiyas, I., Liberalization and Regulatory Reform in Electricity Sector, (Istanbul: Turkey, TESEV Publica-

tions, 2006) in Turkish.

22

Num. Of Name of Associated Provinces Agg.'edDisRe DisCo Ratio

1 Dicle Elektrik Dağıtım A.Ş. Diyarbakır, Mardin, Siirt, Şanlıurfa, Batman, Şırnak 62,6

2 Vangölü Elektrik Dağıtım A.Ş Bitlis, Hakkâri, Muş, Van 61,2

3 Aras Elektrik A.Ş Ağrı, Erzincan, Erzurum, Kars, Bayburt, Ardahan, Iğdır 33,5

4 Çoruh Elektrik Dağıtım A.Ş Artvin, Giresun, Gümüşhane, Rize, Trabzon 13,4

5 Fırat Elektrik Dağıtım A.Ş Bingöl, Elazığ, Malatya, Tunceli 15,3

6 Çamlıbel Elektrik Dağıtım A.Ş Sivas, Tokat, Yozgat 11,0

7 Toroslar Elektrik Dağıtım A.Ş Adana, Mersin, Osmaniye, Hatay, Gaziantep, Kilis 16,5

8 Meram Elektrik Dağıtım A.Ş Kırşehir, Nevşehir, Niğde, Aksaray, Konya, Karaman 8,7

9 Başkent Elektrik Dağıtım A.Ş Ankara, Kırıkkale, Zonguldak, Bartın, Karabük, Çankırı, Kastamonu 9,4

10 Akdeniz Elektrik A.Ş Antalya, Burdur, Isparta 10,2

11 Gediz Elektrik Dağıtım A.Ş

İzmir, Manisa 7,5

12 Uludağ Elektrik Dağıtım A.Ş Balıkesir, Bursa, Çanakkale, Yalova 7,1

13 Trakya Elektrik Dağıtım A.Ş Edirne, Kırklareli, Tekirdağ 10,8

14 İstanbul Anadolu Yakası Elektrik Dağıtım A.Ş İstanbul – Asia Part 10,5

15 Sakarya Elektrik Dağıtım A.Ş Sakarya, Bolu, Düzce, Kocaeli 13,9

16 Osmangazi Elektrik Dağıtım A.Ş Afyon, Bilecik, Eskişehir, Kütahya, Uşak 8,0

17 Boğaziçi Elektrik Dağıtım A.Ş İstanbul – European Part 19,3

18 Kayseri ve Civarı Elektrik T.A.Ş Kayseri -

19 Menderes Elektrik Dağıtım A.Ş Aydın, Denizli, Muğla 9,4

20 Göksu Elektrik Dağıtım A.Ş Adıyaman, Kahramanmaraş 12,2

21 Yeşilırmak Elektrik Dağıtım A.Ş Amasya, Çorum, Ordu, Samsun, Sinop 12,7

Please also find the map of Turkey which demonstrates the DisRes illustrated by the author.

23

4.2.2. DisRes of Turkey (Graphic V)

Illustration made by the author in accordance with the above-presented table.

24

4.3. An Important Development Affecting DisRes

On July 2005, Law 5398 which amended EML was enacted. By this amendment, a new

concept which did not exist in EML prior to this amendment has been created. That is

Organized Industrial Zones (OIZ) [Organize Sanayi Bölgeleri]. According to this; OIZ are

entitled to conduct activities in generation, distribution within the approved borders in

order to meet the demands of their participants upon receiving associated license.91 In

practice that means that the number of distribution companies may increase to over 100. It

is not clear, for example, whether each zones will sign a vesting contract. Apparently the

main purpose for this change is to ensure cheap electricity to industry.92

4.4. Why Did the Distribution Take First Place in Privatization?

The privatization in TEI will be commenced in distribution. The reason mentioned in SP is

as follows; “Since the distribution companies, holding retail licenses and operating in

liberal market, have to create confidence on investors engaged or to be engaged in

generation activities, privatization will start in the distribution sub-sector.”93 This policy

may be justified by the assertion of proving comfort to new players in generation due to

they will be in need of proving constant cash flow for loans required realizing the

investments. While this process continues, the state-owned generators will be

disaggregated by way of forming portfolio companies. Preventing the concentration among

portfolio companies will also be aimed in this duration.

4.5. How Will the DisCos be Privatized?

4.5.1. Why Has TOR Been Chosen?

Even the most preferred method for privatization, generally, is the transfer of ownership,

TOR method was opted in Turkey in order to prevent possible supreme courts

(Constitution Court of Turkey and Council of State) intervention in privatization. One of

the main reasons of this consideration is that Constitution Court of Turkey, in 1994,

91 It has become the Article 2/g of EML 92 Directly taken from: See, Supra n90 93 See, Supra n37

25

delivered the annulment decision with respect to privatization as per provisions of Law

3291 which envisaged privatization through transfer of ownership. The reasoning of the

Court is as follows94;

1. Transfer of ownership to foreigners; transferring the ownership of the public

services having strategic importance without any restrictions conflicts with

provisions of the constitution.

2. Monopoly and abuse of consumers; the measures that have to be taken in order to

prevent monopoly and to protect consumers rights have not been implemented

properly. Hence, it conflicts with the provisions of 167th and 172nd articles of the

constitution.

3. Transfer of ownership of natural resources; the natural resources such as water or

coal or etc. used in the generation can not be privatized within the assets of the

generation facilities under the 168th article of the constitution due to they are

subject to the ultimate ownership of the state.

4.5.2. The Steps To Be Taken During the Privatization Process

Here is the simplified road map that is being used for the privatization process;95

Defining Distribution Regions; as it has been mentioned above, Turkey has been

divided into 21 DisRes in pursuant to HPC decision in SP. The number of DisRes is

criticized by WB and other international Institutions in terms of exorbitance

number of DisRes as the geographical attributes and technical data taken into

consideration. In other words, Turkey may be said to have too small DisRes.

Corporatisation of DisCos; As of August 2006, Corporatisation of DisCos which is

a mandatory conduct of unbundling and liberalization has been implemented

properly.

94 Turkish Competition Authority (official web site), 1st Circuit Opinion with respect to Privatization of

TEDAS (2005), at http://www.rekabet.gov.tr/word/gorus/tedasgorus.doc (last visited on 8 August 2006) in Turkish.

95 Taken from TCA’s Opinion and modified by the author.

26

Signing TOR Agreements;96 TOR agreements were concluded between TEDAS and

recently formed DisCos, in other words, between two state owned institutions. This

is also important, because the company who wins the bid is to be undertaking all

provisions of TOR agreement in which it can not change any provisions. Hence,

this way of signing TOR agreements have been negatively commented by

concerned investors. There are a lot of controversial provisions in TOR agreements

that can deteriorate willingness of the investors such as the provision stipulating

any investment to be realized within this contract term by DisCos will belong to

state.97 Also, in the event of abstention of required investments supposed to be

done by DisCos, EMRA are authorized revoke the given licenses under EML.

Obtaining Distribution License for DisCos; Any legal entity that is conducting

business or intends to do so has to obtain Distribution License from EMRA under

EML.

Signing Electricity Energy Sales Agreements; these are the agreements that are

named as “transition contracts”. Such as;

• Transition Contracts between the DisCos and the GenCos (portfolio

companies and Private GenCos)98; These contracts should be put in place

before distribution companies are privatized to give the generation

companies/ groups a track record prior to their privatization. The contracts

should continue after the privatization to assure a predictable stream of

revenues in the early years.99

• Transition contracts between the DisCos and TETAS; The energy purchased

by TETAS through “existing contracts” and EUAS Generation, will be

allocated among the DisCos through purchase agreements to be signed

between TETAS and DisCos. In case TETAS is unable to recover adequate

96 EML Article 14; “An agreement for transfer of operational rights may be signed among TEDAŞ and the

electricity distribution companies established to operate within the determined distribution regions save for the ownership of TEDAŞ on the facilities and assets required for the distribution activity and are within TEDAŞ’s field of operation.”

97 This condition is stipulated by the 21st Article of Law 5398. Also, written in TOR agreements. 98 See, Supra n37. See also, Provisional Article 10 of EML 99 See, Supra n37

27

revenues to cover its liabilities arising from long term contracts, these

excess liabilities will be recovered through a surcharge to be added on the

transmission use of system charges.100

• Transition contracts between the EUAS hydro generation and TETAS101

The generation of the hydro power plants that are not included within

disaggregation process and will be under the possession of EUAS shall

continue to selling to TETAS as long as it is deemed necessary to achieve

an average TETAS sales price in order to mitigate high prices of electricity

of PPMs.

Finally, the shares of the companies will be sold; at the end of the privatization

term, the shares of the DisCos who signed the transition contracts will be sold to

the investors. Since this conduct is regarded as a change in share holder scheme, it

will be subject to approval of TCA, and any required amendments will be made in

the associated licenses. [Please See the Annex – 1 which demonstrates the schedule

of TENDER PROCESS in detail, attached to this paper.]

One of the most important problems in privatization of distribution is the high level of

differences among DisRes in terms of technical lose and theft. (See the table in section

4.2.1.) The ratio is highest in the east and southeast part of Turkey where annual income

per head is said to be less than 3,000 USD and these regions have a chronic terror problem

since mid 1980s. Another indicator is that the level of technical lose and theft is very high

in Istanbul because of outstanding and increasing suburban habitants which are consequent

of domestic migration.102

It seems that distribution is going to be privatized before conducting any effort to reduce

loses. In regions where loss ratios are very high, it is doubtful that passing the task of

reducing losses over to the private sector is a wise policy.103 Atiyas also suggests that

reducing losses before privatization by public authorities would be a better policy.

100 Id. 101 Id. 102 Job opportunities and new investments are the main reasons for domestic immigration to Istanbul. 103 See, Supra n90

28

The cost of technical lose and theft is currently financed through a national retail tariff,

which entails cross subsidies from regions with low ratios to those where the ratios are

high. Such a system of cross subsidies will not voluntarily survive once distribution is

privatized.104 Also any other system which does not provide any subsidies will be both

unfair and politically unacceptable due to that will surely lead to large inter-regional

differences in retail prices for non-eligible consumers.105 There is no doubt that Turkey

will face vital social problems in those regions such as increasing terror in those regions.106

Further information with respect to tariffs is provided below.

4.7. Tariff Regulations

Tariff regulations are important in market. The main purposes of regulations are to prevent

monopoly and to secure the consumers welfare. The basic regulations regarding tariffs of

TEI are EML and Electricity Market Tariff Regulation. Also, SP envisages a tariff

regulation which conflicts with the provisions of associated legislation.107

As it is mentioned above, there are high level differences between DisRes in terms of

technical lose and theft in Turkey. Since the technical lose and theft levels of DisRes are

inextricable components of the price of electricity and the price of electricity has a social

dimension, it is vitally important to Turkish State to prevent any price fluctuations which

can cause social reactions.

Even EML does not envisage any subsidies and just states direct cash payments to

consumers in these regions in order to prevent those kinds of undesired situations, SP takes

another approach and stipulates the establishment of a “Price Equalization Mechanism”

(PEM) [Fiyat Eşitleme Mekanizması]. PEM is also called as National Tariff that will be in

force for five years after the privatization. In order to prevent price differentiation among

DisRes which may arise as a result of liberalization of the industry, subsidization will be

performed, under SP, within this “transition period” by way of conducting cross–subsidies

from regions with low ratios to those where the ratios are high. In other words, this 104 Id. 105 Id. 106 Contrary to general belief of foreigners, the most important reason behind Terror in southeast part Turkey

is certainly an economic problem (low annual income rate per person, and low education ratio, etc.) rather than a political or identity conflicts. (the author’s opinion).

107 See, Supra n37

29

“transition period” which expires by the end of December 2010, has been defined for the

purpose of balancing the tariffs between the DisRes.108

This equalization mechanism will be implemented to align the principle of achieving cost

reflective regional tariffs for the DisRes, with the objective of ensuring uniform national

tariffs for non-eligible consumers. At the end of this period, the tariffs are to be defined by

the market itself by taking cost and other imbursements into consideration (cost based

tariff calculation). TCA approves PEM and finds this mechanism useful, however it also

stresses the importance of achieving a competitive market by the end of transition

period.109

5. COMPETITION

Even competition issues of TEI arising from privatization are deserved to be addressed in a

separate research paper due to they are very controversial, they are addressed here from

general perspective.

5.1. Which Will Prevail, EML or SP?

Even SP which outlines the major steps to be taken as privatizing the industry, is not

legally binding due to it is not a Code, it is easy to state that it is as powerful as applicable

legislation due to any required amendments to applicable legislation is made in pursuant to

SP. One of the examples to this power is the amendment made in EML by Law 5398 in

2006. (See section 5.2.) We are telling about this power because SP has conflicting

provisions with EML. The conflicting provisions between EML and SP are mostly related

to competition issues.

EML envisages privatization of distribution activities separately from retail activities

whereas SP envisages privatization of these two activities together. Hence, while EML

entitles non-eligible consumers to acquire their electricity from either DisCos or RetCos in

their region, SP mandates non-eligible consumers to acquire their electricity solely from

108 Id. 109 See, Supra n94

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DisCos that will also engage in retail activities under SP.110 As of today, even TCA

delivered its opinion in favor of the prediction set out in EML, it seems that the

privatization will be realized in accordance with SP.

Many commentators criticize the privatization of distribution activities together with retail

activities due to its position to slowing down of introduction of competition in retail

markets. It is also possible to say that this means vesting monopoly rents to tender winner.

It is generally believed by public that these steps have been undertaken to increase

privatization revenues or to make these assets more attractive for tender participants. The

notion “making assets more attractive” not only conflicts with the statement made in SP111

but it also conflicts with the Opinion delivered by the TCA. Privatizations should be

conducted for the purpose of introducing competition into the electricity industry.

5.2. Law 5893 and Vertical Integration

On July 2005, Law 5398, which amended some provisions of EML, was enacted.112 This is

one of the most controversial issues in recent times due to this Law stipulates some

important modifications in EML such as;

Law 5398 allows DisCos to build their own GenCos by fulfilling two requirements. The

First one is “accounting separation” between companies and the second one is “sale price

of electricity” between DisCos and GenCos which DisCos own or affiliated to, can be no

higher than the average sale price of wholesale market.113 Before the enactment of this

Law, engaging in generation activities of DisCos had been restricted to 20% of the total

electricity supplied in that region in preceding year under EML.114 There is no restriction

exists on DisCos in terms of their engagement in electricity generation as per Law 5398.

This explicitly means that Law 5398 provides integration opportunity to DisCos and

GenCos. This is a vitally important issue in terms of vertical unbundling which means

separation of activities of transmission and distribution from the activities of generation

and retail. This conduct is one of the most important “sine qua non” activities for any

110 See, Supra n37 111 Id. “the privatization approach will not be solely aimed at the maximization of privatization income.” 112 See, Supra n5 113 Article 22 of Law 5398 114 It was article 3/c-3 of EML before it was revoked.

31

country decided to liberalize its electricity industry and introduce it into competition. This

notion is based on the fact that transmission and distribution are natural monopolies.

Hence, without assuring third party access, the competition will not be introduced into

industry. By doing so means the natural monopoly is just transferred from public to

private. The private actors will surely try to increase their rent by way of restricting other

participants. Therefore, assuring the competition in TEI will not be easy.

Atiyas mentions that, change was introduced during discussions at the parliamentary

committee and was not applied to EMRA for its opinion. No reason for this important

change was released to the public. It was widely interpreted as a move to increase the

privatization revenue of distribution companies and an incitement given to potential buyers

of those assets. Besides this amendment, EU directives require distribution to be at least

legally separated from retail supply and generation in member countries until 2007. The

directives stipulate additional measures to ensure independent decision making, in case

distribution is legally separated but is controlled by groups that also control generation or

retail supply activities.115 In a recent sector inquiry carried out by the European

Commission, vertical integration and foreclosure is identified as a major impediment to

competition.116 TCA also stated that distribution should be at least legally unbundled, if the

separation of ownership might not be conducted.117 This separation will be the ultimate

condition for the approval of privatization.118 Under Turkish Law, privatization

transactions are treated no different than a normal acquisition or merger. As a result, these

privatizations are also subject to ultimate approval authority of TCA. This is very

important because if the bids are conducted without making required modifications

stipulated by TCA would, most probably, be terminated by TCA. TCA also asserted that

the provisions under SP had been set forth in favor of supply security and foreign

investment; however the consumer rights and competition issues not addressed properly.

115 See, Supra n90 116 Id. 117 See, Supra n94 118 Id.

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6. CONCLUSION

Restructuring or Reform Period of TEI was commenced as a result of insufficient public

funds and poor performance of public electricity monopoly as well as the advices given by

the international institutions such as WB and IMF. After the codification of EML, state-

owned monopoly was unbundled into generation, wholesale, transmission, distribution and

retail sale segments in parallel to the provisions of EML by the Decree of CoM in 2001.

However, SP which envisages the major steps to be taken in order to realize the

privatization was issued by HPC in 2004 and it has conflicting provisions with EML.

Even we mentioned above and do not intention to repeat the competition issues here again,

we also want to stress the importance of the amendment made in EML by Law 5398

because if the coming bids are realized as per Law 5398 they would, most probably, be

terminated by either Constitution Court or by CoS if not terminated by TCA based on the

maxims exist in associated legislations.

Besides these developments which are carried out by the government in order to increase

the privatization revenue of distribution companies, there are some other developments

which are also carried by the same government in order to demonstrate to public or to the

newspapers that the state control over the assets having “strategic importance” will not be

lost. As parallel to this notion TOR agreements in which indigestible provisions such as

termination of the contract by TEDAS without paying any imbursement or responsibility

disclaimer of TEDAS exist, concluded between two state-owned institutions (TEDAS and

newly formed DisCos) prior to conducting privatization. Hence, the bid winner will have

to bear TOR’s conditions that he has no authority to change. In short, the government

desires not to lose control over DisCos whilst it still wants to increase privatization

revenue. This confusion in government’s notion also reflects in the applicable legislation

which gives rise to regulatory uncertainty.

We believe that Government should opt to publish a policy text (may be a “white paper”

first) in order to reduce this kind of regulatory uncertainty in industry. This text would not

only refresh academic works also would help government to gain public support which is

an important component of privatization.119 This can be fallowed by a “green paper”

119 See, Supra n3

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which would provide information about recent developments in the reform process and the

problems faced.120 Such an approach would also help generate a meeting of minds among

different agencies responsible for energy policy. In addition, publications of regulatory

decisions with their reasoning would contribute significantly to transparency.121

From the above, it is easy to conclude that even Turkey has moved forward a lot since the

codification of EML in terms of restructuring the industry, there are still important issues

waiting to be addressed or to be settled between concerned state and private parties of the

process. Consequently, Turkey has got on electricity privatization boat which has a long

journey. Hence, Turkey has a long way to take and lots to learn by this full of experience

journey.

120 See, Supra n90 121 Id.

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7. ANNEX – 1 The below given diagram is directly taken from Osman Demirci’s work.122

122 Ph.D. Demirci, O., TEDAS Privatization (March 2006), at www.turkey-now.com/db/docs/osman_demir

ci.pdf (last visited on 29 August 2006).

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8. BIBLIOGRAPHY

8.1. PRIMARY SOURCES

8.1.1. National Legislation (Selected Laws and Regulation)

Law 4628 (entered into force March 2001)

Law 4046 (entered into force November 1994)

Law 3996 (entered into force June 1994)

Law 3096 (entered into force December 1984)

Electricity Market Balancing and Settlement Regulation (entered into force November

2004)

8.2. SECONDARY SOURCES

8.2.1. Books

Atiyas, I., Liberalization and Regulatory Reform in Electricity Sector, (Istanbul: Turkey,

TESEV Publications, 2006) in Turkish.

Serhat Guney, E., Restructuring, Competition, and Regulation in the Turkish Electricity

Industry (Istanbul: Turkey, TEPAV Publication, 2005).

8.2.2. Articles

Cetin, T., Oguz, F., The Politics of Regulation in the Turkish Electricity Market, Energy

Policy Journal, article in press, at doi:10.1016/j.enpol.2006.05.014 (last visited on 07

August 2006).

Erdogdu, E., Regulatory Reform in Turkish Energy Industry: An analysis, Energy Policy

Journal, article in press, at doi:10.1016/j.enpol.2006.02.011 (last visited on 07 August

2006).

Hepbasli, A., Development and Restructuring of Turkey’s Electricity Sector: a Review,

Renewable and Sustainable Energy Reviews 9 (2005), at 311-343.

36

Ozkıvrak, O., Electricity Restructuring in Turkey, Energy Policy Journal 33 (2005), at

1339-1350.

8.2.3. Research Paper

Bodur, C., Regulatory Framework of Build-Operate-Transfer Model in Turkey, (submitted

Research Paper for International Project Finance course at CEPMLP, April 2006).

8.2.4. Internet Sources

BEDAS, History of Electricity in Istanbul, at http://www.bedas.gov.tr/bedas/tarihce.php

(last visited on 07 August 2006) in Turkish.

Energy Market Regulatory Authority (official web site), Annual Report (2005), at

www.epdk.gov.tr/yayin_ rapor/yillik/yillik.htm (last visited on 7 August 2006).

High Planning Council, Electricity Sector Reform and Privatization Strategy, at

www.oib.gov.tr/program/2004_program/2004_electricity_strategy_paper.htm (last visited

on 7 August 2006).

International Energy Agency, Turkey Country Analysis Brief (June 2005), at www.eia.doe.

gov/emeu/cabs/turkey.html (last visited on 7 August 2006).

Kulali, I., Electricity Sector and Privatization studies in Turkey, at http://ekutup.dpt.gov.tr/

kit/kulalii/elektrik.html (last visited on 7 August 2006) in Turkish.

Ph.D. Demirci, O., TEDAS Privatization (March 2006), at www.turkey-now.com/db/docs/

osman_demir ci.pdf (last visited on 29 August 2006).

Pritchard, R., Eight Guidelines of Electricity Industry Reform, Vol. 12-7 Article. Online

Journal CEPMLP (August 2002) at www.dundee.ac.uk/cepmlp/journal/html/volume12.php

(last visited on 10 August 2006).

37

Pritchard, R., Andrews-Speed, P., Eight Principles of Electricity Industry Reform, Vol. 7-2

Article. Online Journal CEPMLP (July 2000) at www.dundee.ac.uk/cepmlp/journal/html/

volume 7. php (last visited on 10 August 2006).

State Auditing Agency, Research Report With Respect to applications of BOT and TOR, at

www.tccb.gov. tr/tr_html/DDK/enerji.htm (last visited on 07 August 2006) in Turkish.

Turkish Competition Authority (official web site), 1st Circuit Opinion with respect to

Privatization of TEDAS (2005), at http://www.rekabet.gov.tr/word/gorus/tedasgorus.doc

(last visited on 8 August 2006) in Turkish.

Turkish Electricity Distribution Co. (official web site), History of the Institution, at

http://www.tedas.gov.tr/1,Hakkimizda.html (last visited on 07 August 2006) in Turkish.

Turkish Electricity Trading and Contracting Co. (official web site), at www.tetas.gov.tr/

tanitimson.htm (last visited on 7 August 2006) in Turkish.

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