Turkey: Natural Gas Market Tariffs Under Turkish Law

Last Updated: 28 July 2010
Article by Erenalp Rençber and Pinar Aksakal

Turkey holds a strategic role in natural gas between the world's second largest natural gas market, Continental Europe, and the substantial gas reserves of the Caspian Basin and the Middle East. For over a decade, Turkey has sought to capitalize on its advantageous geography by establishing itself as an energy bridge between these major gas-consuming and gas-producing regions, as natural gas need of Continental Europe has been increasing day by day.1

The most significant legal regulation that governs the natural gas sector in Turkey is the Natural Gas Market Law No. 4646, which was adopted on April 18th, 2001. As it is stated, the purpose of the law is "to create a financially strong, stable and transparent natural gas market through liberalization of the natural gas market in order to provide consumer with high-quality, continuous and affordable natural gas within the framework of competitive principles and to ensure an independent regulation and audit on the market". Consequently, the various components of this market are to be privatized, even though this process has proceed slowly.

This article aims at providing a general overview with respect to the natural gas market tariffs under the Law, the Regulation and the Communiqué. The tariffs under the natural gas market law are governed by Natural Gas Market Law (Law No. 4646) (the "Law"), Natural Gas Market Tariffs Regulation (published in the Official Gazette dated 26 September 2002 and numbered 24888) (the "Regulation") and Communiqué regarding the Determination of Natural Gas Volume subject to Invoicing Process and the Elements of Invoicing Process (published in the Official Gazette dated 31 December 2002 and numbered 24980) (the "Communiqué").

The procedure and principles regarding the determination of the tariffs and approval of the same by the Energy Market Regulatory Authority ("EMRA") are regulated under Article 11 of the Law and Article 9 of the Regulation. The Law and the Regulation prescribe five types of tariffs namely (i) connection tariff, (ii) storage tariff, (iv) wholesale tariff and (v) retail sale tariff as defined below:

  1. Connection Tariffs: The connection tariff principles to be determined by EMRA comprise the terms and conditions based on the principle of non-discrimination among eligible customers which have equal standings for the connection to a transmission or distribution system. Such principles shall be stipulated in the relevant connection agreements. Applicable prices to eligible customers shall be determined in line with such principles and by taking into account the result of the negotiation between the parties. However, with respect to the subscribers located in areas under the responsibility of distribution companies, fixed connection tariffs approved and published by EMRA shall apply.
  2. Transmission Tariffs: The tariffs pertaining to transmission and dispatch shall be determined by EMRA pursuant to principles and procedures stated in Article 12 of the Regulation. The transmission tariff includes prices, terms and tariff conditions which shall be applied in a non-discriminatory manner to parties using the transmission network for transportation of natural gas produced, imported or exported. Transmission tariffs are determined according to the entry-exit system, based on transmission distance, amount of natural gas transmitted, and other factors determined by EMRA, taking into account the network operation rules. The legal entities performing the transmission and supervision of dispatch service notify their proposed tariffs to EMRA for its approval within the period to be determined by EMRA. The final tariffs are determined based on the tariffs notified to EMRA and the principles stated in Article 11 of the Law and in Article 12 of the Regulation. The transmission tariff comprises transmission capacity charges and transmission service charges and is payable by gas suppliers to the transmission company.
  3. Storage Tariffs: Storage prices are set through negotiations between the storage companies and legal entities purchasing storage service, provided that such prices are in conformity with the tariffs approved by EMRA. Storage companies shall prepare the basic usage principles and procedures for each storage facility that they own and submit them for the approval of EMRA, sixty (60) days before the commencement of the implementation period. Such principles and procedures shall come into effect upon the approval of EMRA.
  4. Wholesale Tariffs: EMRA determines the principles and conditions to be taken as a basis for the natural gas wholesale tariffs. Natural gas wholesale prices are also determined within the framework of the principles set out in Article 13 of the Regulation and through negotiations between parties engaged in natural gas sale and purchase, provided that such prices are in conformity with the tariffs approved by EMRA. Article 13 of the Regulation sets out that in determination of the wholesale tariffs, the abuse of a dominant position should be avoided, natural gas supply security and reliability should be ensured and other measures determined by EMRA in relation with this issue should be followed.
  5. Retail Sale Tariffs: The retail sale tariffs comprise natural gas unit purchase price, unit service and depreciation charges, and other factors. Distribution companies shall not demand any payment, for any reason whatsoever, from the consumers, other than payment of the retail sale tariff approved by EMRA. Distribution companies may implement seasonal tariffs and/or interruptible and/or non-interruptible tariffs, provided that they are in conformity with tariffs approved by EMRA. The retail sale tariff applicable to eligible customers purchasing natural gas and transportation service from a distribution company shall be determined through negotiations between the relevant parties, on the condition that such prices should not exceed the prices approved by EMRA. The retail sale tariffs may be re-determined by taking into consideration inflation and other issues (e.g., the service coast, reasonable profit that provide opportunity for investment, current natural gas purchase prices in the market and similar factors), upon application of the distribution companies to EMRA. The terms and conditions of the tariffs approved by EMRA are binding upon all real persons and legal entities subject to such tariffs.

The tariffs to be prepared by the relevant legal entities within the framework of the principles of the Law and the Regulation shall be submitted to EMRA for its approval and review ninety (90) days prior to the end of the previous tariff period. In the event that EMRA gives its approval, such tariff shall be applied during the tariff period determined by EMRA, which is also entitled to make adjustments on the principles and limits of the tariffs, in consideration of the inflation and other factors.

Pursuant to Article 8 of the Regulation, for the purpose of preparation, review, evaluation, approval and revision of the tariffs, EMRA may request, from the legal entities, information and documents in respect of income/expenses and costs determined on the basis of basic assumption and separation of accounts, balance sheet and income statements, investments, natural gas and associated service and quality of service, all being actual values for the past two years, estimates for current year and budgeted amounts for the next year.

With respect to legal entities which start performing the market activity in the middle of a calendar year (i.e. not as of January), tariff proposals and the information and documents stated in Article 8 of the Regulation shall be submitted to EMRA at least sixty (60) days prior to the effective date of the relevant tariff.

Tariff applications which are not filed in accordance with the relevant procedure shall not become effective until the non-conformity is remedied. In such a case, the applicant shall be informed in writing and a certain time period shall be given to remedy the non-conformity. If the legal entity does not file its application and/or does not remedy the non-conformity within the given period, relevant tariffs shall be determined by EMRA. The tariffs which are approved or determined by EMRA shall be disclosed by the relevant legal entity to the public by way of an announcement on the website of the relevant entity.

In addition to the general principles as outlined above, Article 5 of the Communiqué sets out general principles and formulas for determination of retail sale price. Pursuant to such Article 5 of the Communiqué, retail sale price comprises natural gas unit purchase price, unit service and depreciation charges and other factors. These other factors are not defined in the Communiqué.

The distribution company is required to reflect the prices in the retail sale tariff as cubic meter (m3) to be calculated based on energy (kWh) and maximum heat value equal to 9155 kcal/m3. The retail sale price defined by cubic meter is calculated in accordance with the following formula: Fs = f X 10,64 kWh/m3

In this formula,"fs" means the retail sale price on the basis of maximum heat value of 9155 kcal/m3 (TL/m3), and "f" means the retail sale price (TL/kWh).

Footnote

1. The natural gas consumption of Europe is expected to be increased 653 billion m3 in 2030, as it is 505 billion m3 in 2007. Reduction of European consumption dependency to Russia is very important for Turkey in order to be an energy terminal in the long run.

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