Turkey is a member of international organizations such as the UN, the Council of Europe, NATO, OECD, the Organization for Security and Cooperation in Europe, WTO, the Organization of Islamic Conference (OIC), the Black Sea Economic Cooperation Organization, the Economic Cooperation Organization (ECO). Turkey is now a candidate for full EU membership and considered as one of the nine most important countries which the British Government wants to establish and increase commercial relations with.

Turkey since 1983, has been trying to undertake serious macro economic structural reform together with its transition to deeper democracy. In this respect, the energy sector constitutes one of the most important areas in which structural reform takes place and serious foreign direct investment is expected in order to inject permanent cash into the economic system.

In this respect market liberalization activities have taken bold steps in the last five years. As a part and complementary to these steps privatization is viewed as the turning point in the sustainability of the new regime in energy.

The Privatization of the electricity distribution business in Turkey is the hot issue in the agenda right now. 20 new distribution companies have been established from within the body of TEDAS (the Turkish Electricity Distribution Company owned by the state) as it had been restructured in 2004.  based on geographical proximity, managerial structure, energy demand and other technical/financial factors.

 

These joint-stock companies engaged in the distribution and retail sale of electricity and provision of retail services to final customers has approximately 28 million customers, 93 billion kWh of electricity sales and 98% market share in electricity distribution across Turkey according to very recent figures.

 

A total of 21 distribution companies are now active in electricity distribution operations with the Kayseri and Its Surroundings Electricity Distribution Company (already private). TEDAS is also legally present as a holder of the  network entities as well.

 

There are some principles which were declared to be adhered to, during the process of the privatization of the electricity distribution business, which were agreed upon by the relevant authorities to make this aim worthwhile for Turkey.  These are: 

 

- The privatization will be performed by the Privatization Administration within the framework of Law no. 4046,

- Income maximization will not be the sole aim.

- Increases in electricity prices after privatization will not be on a permanent basis.

- Strong companies to achieve the principles of the program will be encouraged in the privatization process,

The mandatory investments and maintenance activities will be performed independently from the privatization process,

A competitive generation structure will be established through appropriately grouping generation assets prior to their privatization. Seventeen hydropower plants, which total 7.055 MW of capacity will remain in government ownership,

The privatization approach will take into account existing public liabilities and will not lead to additional state guarantees,

The transmission system and market operator, TEIAS, will remain in state ownership,

Only distribution companies are allowed to supply non-eligible consumers.

 

Before the starting of the tender process for distribution privatization, there were some issues to be tackled with;

 

The distribution companies’ tariffs for the wire and retail businesses were to be set through the finalization of  transition contracts between the distribution companies and the generation groups, or  transition contracts between the distribution companies and TETAS (Electricity Wholesale Company owned by the state), and transition contracts between the EUAS (Electricity Generation Company owned by the state) hydro generation and TETAS.

 

The generation of the hydro power plants which will remain to be state owned and under the possession of EUAS shall continue to be sold to TETAS as long as it is deemed necessary to achieve an average TETAS sales price that reflects the expected market price. TETAS¸ can buy electricity at a low price from these plants to compensate for the additional burden caused by electricity purchases at prices exceeding the market price from the BOO (Build, Operate, Own) and BOT (Build, Operate, transfer) schemes.

 

The energy purchased by TETAS through existing contracts and EUAS generation, will be allocated among the Distribution Companies through purchase agreements to be signed between TETAS and distribution companies.

 

In case TETAS is unable to recover adequate 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.

 

Sales Contracts between Portfolio Generation Companies and Distribution Companies  should be put in place before distribution companies are privatized to give the generation company 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. The transitional contracts in the last two groups will initially cover about 85% of total demand of captive consumers in each distribution region. The rest 15% should be supplied from private sources and the distributions companies have no more a limit on the amount of their own generation which will be an incentive for the investors.

 

The transitional balancing and settlement mechanism for the wholesale market is forecasted to be operational in order not to prevent the development of wholesale market.

 

The following corporations have been established prior to privatization within the context of the High Planning Council Decision dated 17.03.2004 and Decree No:2004/3.

 

 

 

The above mentioned companies and their tariff structures and licenses have been approved very recently by the Energy Market Regulatory Board, the transitional balancing and settlement mechanism for the wholesale market and also the market management system of TEIAŞ are said to be in place which finally provided them the possibility for readiness for privatization by the Privatization Administration (oib.gov.tr).  

 

The Privatization Administration has started the privatization process with the simultaneous tender of 3 companies

 

a. Baskent Elektrik Dagitim A.S. (“BASKENT” Region 9)

b. Istanbul Anadolu Yakasi Elektrik Dagitim A.S. (“AYEDAS” Region 14)

c. Sakarya Elektrik Dagitim A.S. (”SEDAS” Region 15)

 

Privatization of distribution companies is planned to be executed using a Transfer of Operating Rights (“TOR”) backed Share Sale model ("TSS model"). In this model, the investor will be the owner of the shares of the company who will hold the licensee for the distribution of electricity in the relevant region but it will not hold the ownership of the network assets in the same region. They will remain with TEDAS. The investor will be granted the right to operate the distribution assets stemming from a Transfer of Operating Rights Agreement ("TOR Agreement") with TEDAS. Under this market structure, privatized electricity distribution companies will act as regional monopolies with distribution licenses to be obtained from Energy Market Regulatory Authority (EMRA).

 

The main purpose of this system is to achieve lower tariffs by increasing overall system efficiency. In this respect, the tariffs are calculated on a “cost-reflective” basis with predetermined operating and loss/theft betterment objectives. The first tariff implementation period (or transition period), set between 2006 and 2010, will serve as a transitory period to a fully cost based tariff structure after 2010. EMRA recently approved the end user tariffs and revenue requirements of each distribution company for the transition period. Revenue requirements cover the forseen expenses for providing distribution and retail services and leave room for financial gains for the target level of technical and non-technical losses.

 

The end-user tariffs for the period after 2010 will be determined by the distribution companies in accordance with the Electricity Market Tariffs Communiqué and the related regulations and will be subject to EMRA’s approval. The first period is aimed at having a smooth and gradual transition from existing tariff structure to a lean and simple tariff structure. The tariff structure is determined in compliance with the Electricity Market Law, the Electricity Market Tariffs Communiqué and other related regulations. The four basic tariff components are (1) retail sales, (2) distribution, (3) retail services and (4) transmission; which are regulated in an unbundled fashion. Retail sales tariff has a “price cap” which is set as the average price of the energy purchased by the distribution company. Distribution and retail services have “revenue caps” which cover operating expenses and investment requirements related to distribution and retail services. Transmission tariff is a complete pass-through of transmission costs as charged by TEİAŞ.

 

When we decompose the end-user tariffs, we come across with the following items in the basket:

 

Customers:

 

• Residential

• Commercial

• Industrial

• Agricultural

irrigation

• Street

lightening

 

Retail Tariffs:

 

Reference Price (Energy price )

Operating margin

Lost/theft component

 

Distribution System Usage Tariff:

 

Taxes and other deductions

Transmission tariff

Retail services tariff

Distribution OPEX component

Investments, amortization and cost of capital component

TOR value component

Dual-term tariffs: capacity charge, penalty for overload and reactive energy fee

 

Distribution Company

 

Pass-through of energy costs (TETAŞ)

Pass-through of transmission costs (TEİAŞ)

 

: Total end-user electricity tariff

 

 

The consumer price of electricity is subject to some levies: (1) 1% for the Energy Fund Share; (2) 2% for Turkish Radio and Television Corporation surcharge; (3) the aggregated amount of the two preceding levies is then subject to the Municipality Consumption Tax (5% for households and 1% for industrial users); and (4) 18% VAT.

 

Tariffs for captive customers and for wholesale by TETAS are regulated. Under the Electricity Market Tariffs Regulation and the related communiqués, tariffs must be cost-reflective; costs not directly related with market operations should be left out of the equation. Direct refunds may be granted to consumers in need without compromising the overall cost-based principle of the tariff structure in accordance with the Electricity Market law. Once determined by companies, regulated tariffs are subject to review and approval by the EMRA. All tariffs are published in the Official Gazette and on the regulator's website to ensure transparency.

 

 

The primary benefits expected from electricity sector reform and privatization have been determined as follows: 

Decreasing of costs through effective and efficient operation of electricity generation and distribution assets,

Increasing the supply quality and supply security in the electricity sector,

Decreasing the technical losses in distribution sub-sector to the level in OECD countries and prevention of theft (non-technical losses),

Ensuring that the required rehabilitation and expansion investments are performed by the private sector without creating any liabilities on the public institutions, and

Transferring to consumers the benefits obtained through competition in generation, trade of electricity, and regulation of quality of service.

 

Steps that are required for creating confidence in local and international investors shall be taken immediately by the government, while efforts will be made to minimize the cost of transition to liberal market model on the public institutions currently operating in the market.

 

In order to ensure that there are no supply constraints during the transition period, temporary measures shall be taken to obtain adequate additional capacity. Such measures will be complemented with other programs, such as imports and rehabilitation of existing plants.

 

The main principle will be the implementation of cost reflective prices in the regulated electricity sectors, whereas the national tariff practice will be operational for the first tariff implementation period through establishment of a tariff equalization mechanism that will prevent price differences for non-eligible consumer tariffs. 

 

 

In addition to the distribution business, generation assets that belonged to the state are going to be restructured and privatized through grouping. In this respect the energy generation parts (sections) of all hydroelectric power plants constructed, commissioned or to be commissioned by State Hydraulic Works (DSI) and the inseparable immovables of these will be transferred to EUAS on the basis of their actual costs without paying any charges to DSI. 

 

The generation facilities to be privatized will be identified and grouped on the basis of two main criteria: (i) prevention of creating market power; and (ii) financial viability.  The liberal market structure to be implemented in Turkey is based on bilateral contracting between buyers and sellers, together with a balancing and settlement regime. To achieve the objectives and principles of this strategy it is essential that the balancing and settlement regime acts as a market where uncontracted generation can be bought and sold.   This will enhance security of supply because it facilitates participation of independent and relatively small generators. 

 

The priorly transitionary contracts will be set at regulated prices and will last for a maximum of 5 years, except for TETAS contracts.   As they run out such contracts will be replaced by market priced bilateral contracts and thus, will ensure a smooth transition to liberal market. The balancing and settlement mechanism will be in compliance with the objective of creating a spot market and will include price signals to attract new investments. 

 

In accordance with the introductory themes of liberalization, privatization and FDI; the Government of Turkey enacted a 'Decree on Improving the Investment Environment in Turkey” on December 11, 2001 as a part of a national strategy to increase the overall level of income and productivity and to raise the level of competitiveness of firms operating in Turkey.

The mentioned decree established a coordinating body called as the  'Coordination Council for the Improvement of the Investment Environment (CCIIE)”, with the mandate to identify and remove regulatory and administrative barriers to private investment. This is a good step in the right direction to attract new FDI into the country rather than hot injections of foreign currency that do more instabilization in the Turkish economy than good as it is mainly used for arbitrage and stock market manipulations. FDI comes into the country for good and for more employment and better quality of life and services.