Turkey: The New Draft Law For Electricity Market

The new draft Electricity Market Law ("Draft Law") has been published on the web-site of Energy Market Regulatory Authority ("EMRA"). If Draft Law is promulgated and enters into force, the Electricity Market Law numbered 4628 ("EML")1 will be abrogated. When compared with the EML, the Draft Law envisages some important changes and herein this article, these changes will be reviewed.

Activities and Licenses

The electricity market activities which can be conducted under a license are listed under Article 4 of the Draft Law as generation, transmission, distribution, wholesale, retail sale, market operation, and export and import activities. Differing from the EML, while the activities of retail sale service and trade are not mentioned, market operation activities are introduced as an activity type.

Under the Draft Law, the licenses and the rules to be applied to them are regulated based on the above indicated classification of the activities. In other words, the Draft Law is structured upon the types of activities rather than the types of licenses. Coordinated with the changes in the activities, there are some significant changes with respect to the licenses and the license holders.

Preliminary License for Generation Activities:

As per Article 6 of the Draft Law, a preliminary license is required for commencement of generation activities. It is regulated that for the legal entities who apply to engage in electricity generation activities, a preliminary license will be issued for a certain term in order for those entities to obtain the necessary documents like permits, approvals and licenses and to acquire the property and the usufruct rights of the lands to be utilized for the establishment of the generation facility. The term of the preliminary license cannot be more than twenty four months including the force majeure events. EMRA is entitled to extend this term as per the source type and the installed capacity.

It is stipulated in the Draft Law that the legal entities who could not obtain the above mentioned documents, certify the acquisition of the property or usufruct rights of the lands or fulfill other legal requirements shall not be granted a generation license. In addition, until the grant of the generation license, in case of any direct or indirect change in the shareholding structure with the exception of inheritance, realization of any actions of transaction which will lead to transfer of shares or non-fulfillment of other legal requirements, the preliminary license will automatically be null. Moreover, the expiry of the license term and the bankruptcy of the legal entity, which holds the preliminary license are also listed as the circumstances, which lead to automatic nullity of the preliminary license. In case of nullity of the preliminary license, the license holder entity or other legal entities holding at least 10% (or in case of public companies 5%) of the preliminary license holder entity cannot apply for another preliminary license for the same location within one year as of the date of revocation.

As per the above, indicated situations with respect to the automatic nullity of the preliminary license, there is no clarity in the Draft Law regarding the time of such nullity. On the other hand, as explained below, while the requirement to obtain approval of EMRA for the share transfers of the license holder legal entities is no longer preserved, ruling that any share transfer will lead automatic nullity of a preliminary license is a contradictory proposition.

Distribution License Holders and Other Market Activities:

In accordance with the current EML, companies who hold distribution licenses can establish generation facilities by obtaining generation license and can enter into affiliation with the legal entities who conduct generation activities provided that they amend their agreements in accordance with the new regulations in a way to fulfill the conditions of free competition. However, Draft Law sets forth an important restriction in that regard. As per Article 9 of the Draft Law, distribution companies cannot conduct activities other than distribution activities and become a shareholder to other legal entities who engage in market activities either directly or indirectly. On the other hand, while generation companies are restricted to be a controlling shareholder of a distribution company under the EML, the Draft Law provides that the legal entities who engage market activities can be direct or indirect shareholder of a distribution company without indicating any control restriction. Without a doubt, such a shareholding structure providing a vertical integrity should be assessed in light of competition law.

The Draft Law regulates that the distribution companies who also engage in retail sale activities may only realize such activities by incorporating a new company with the same shareholding structure and obtaining a supply license for new company regarding the said distribution area.

Supply License:

The wholesale and retail sale activities, which necessitate different types of licenses as "wholesale license" and "retail sale license" under the EML, are regulated under one license type, namely the "supply license" under the Draft Law. As per Article 10 of the Draft Law, supply companies can conduct wholesale and/or retail sale activities without any limitation of area. In addition, it is indicated that supply companies may also import from and export to the countries with which the interconnection condition is satisfied.

Market Operation Activity:

The market operation activity which is included in the electricity market activities by the Draft Law is defined as the operation of the organized wholesale electricity markets and financial reconciliation activities in such markets.

As it is known, electricity market operation activities are currently conducted by Market Financial Reconciliation Center ("MFRC") organized under Turkish Electricity Transmission Joint Stock Company ("TEIAS") as per EML. The Draft Law foresees that a new company is to be incorporated entitled the Energy Market Operation Joint Stock Company ("EPIAS") and the market operation activities and the financial reconciliation activities of the organized wholesale electricity market will be ceded to this company, and MFRC will be transferred to this company with all its permanent staff and equipment.

The Conversion of the Auto Producer License to the Generation License:

The "auto producer" and "auto producer group" licenses are not explicitly regulated under the Draft Law. Instead, temporary Article 7 of the Draft Law sets forth that generation license will be automatically issued for the auto producer license holders without charging any license fee until 31 December 2012 and the application which were made for the auto producer license are to be considered and evaluated under the terms of generation license applications

License Holder Companies

The Draft Law introduces some changes on the rules regarding the management and shareholding structures of the license holder companies.

Share Transfers in License Holder Companies:

As it is known, according to Article 8 of the EML, in case of the occurrence of a share transfer of the license holder companies resulting in change in the shareholding more than ten percent or more (five percent or more for public companies), merger or consolidation of those companies, change of control in those companies, sale, transfer or any type of change in the legal entity structure, it is necessary to obtain the approval of EMRA, prior to the relevant transaction.

However, Draft Law eliminates such requirement of obtaining the prior approval and it just sets forth a notification requirement under paragraph 3 of Article 5. Accordingly, license holder companies shall notify EMRA, the share transfer in their shareholding of ten percent or more (five percent or more for public companies), change of control and the transactions, which lead to change in the property of the generation facilities. However, EMRA shall not have the authority to approve or not to approve those transactions.

On the other hand, distribution companies are still under the obligation to obtain the permission of EMRA, as per paragraph 4 of Article 5 of the Draft Law, with respect to the share transfer in their shareholding ten percent or more (five percent or more for public companies) and change of control.

Provisions on Total Market Share:

EML sets forth restrictive provisions such as the total market share or the total sale amount for the companies who engage in activities in the market. These restrictions are 10% of the previous year's total sales of energy of Turkey for the wholesale companies, and 20% of previous year's calculated total installed capacity of Turkey.

Draft Law also regulates similar restrictions. Accordingly;

  • the total installed capacity of the generation companies a real person or a legal entity engaged in the private sector control may not exceed 20% of the previous year's calculated total installed capacity of Turkey in the previous year,
  • the total amount of electricity energy generated by supply companies a real person or a legal entity engaged in the private sector control may not exceed 20% of the of the previous year's total consumption of energy in Turkey, and
  • the total amount of electricity energy distributed to areas accessed by distributor companies a real person or a legal entity engaged in the private sector control may not exceed 30% of the previous year's total distributed energy in all areas of distribution.

Changes Regarding the Distribution Companies:

Independent Member for the Board of Directors: Under Article 5 of the Draft Law, it is indicated that the license holders whose tariffs are subject to regulation, in other words the distribution companies, shall have one independent member in their board of directors. The assignment of the rights of those companies and the appointment principles and functions of those independent members will be regulated under a regulation.

Applicable Sanctions to Distribution Companies: Under paragraph 4 of Article 29 of the Draft Law, it is stipulated that the distribution licenses cannot be cancelled. Accordingly, in the event that the distribution companies do not conduct their activities in compliance with the legislation or impede their services or lower the quality grade on an unsatisfactory scale, become insolvent or be in a position to become insolvent, the following sanctions can be applied to those companies by EMRA:

  • dismissal some or all of the board members and appointment of new ones,
  • compensating the financial consideration of the unfulfilled services and investments firstly from the incomes obtained from other activities of such company, if not sufficient, from the dividend earnings of the shareholders and lastly from the assets of the shareholders of the registered shares, and
  • confiscation and transfer of the shares of such company to the Treasury.

On the basis of the foregoing, EMRA will be deemed as the addressee (defendant) of the claims which will be filed against the board members appointed by EMRA to the board of directors of distribution companies due to their duties and in case of a decision for compensation, such compensation will be borne by EMRA, with a right to recourse.

Provisions Regarding Privatization

Implementation of Privatization

The provisions of EML are repeated under Article 31 of the Draft Law. In that respect, the transactions and procedures of privatization with respect to the Turkish Electricity Distribution Joint Stock Company ("TEDAS"), Electricity Generation Joint Stock Company ("EUAS") and the businesses, affiliates, subsidiaries, enterprises, operational units and assets shall be conducted by the Presidency of the Privatization Administration in accordance with the Law on Implementation of Privatization numbered 4046 and dated 24.11.19942 in light of the suggestions and opinions of the Ministry of Energy and Natural Resources.

Exceptional Provision regarding Environmental Requirements:

As per Article 9 of the Draft Law, EUAS or its subsidiaries, affiliates, business or assets or the publicly owned companies which are privatized according to the privatization legislation are granted a grace period until the end of 2018 in order to comply with the environmental laws and to obtain the required permits. Accordingly, it is indicated that because of non-compliance to environmental laws within this period or beforehand, their activities cannot be ceased and no sanction can be applied. This exceptional provision is very important for the generation companies which are or will be subject to privatization.

Temporary Articles on Extension of Some Deadlines

Some deadlines set forth in accordance with the EML are extended with the Draft Law. Some of them are as follows:

  • Price equalization mechanism which is stated to be applied until the end of the year 2012 is extended until the end of the year 2015.
  • The corporate tax and VAT exemptions which were applied until the end of the year 2010 to the mergers, spin-offs and transfers of the companies subject to privatization is extended until the end of the year 2017.
  • 50% discount in the system utilization fees and the exemptions from stamp tax and duties during the investment periods of the generation facilities are extended until the end of the year 2015.

Conclusion

In light of the above explanations, it is understood that the Draft Law is structured based on the market activities. To that end, it is possible to say it is neatly drafted when compared with the EML. On the other hand, although it is specified to the electricity market, there also are some provisions regarding natural gas and petroleum markets. Technically, it would be more appropriate to regulate those issues under their specific laws and regulations.

We believe that the conversion of the EMRA approval requirements to notification requirement in case of share transfers and change of control is a positive development. However, with regard to the preliminary licenses that are set forth to be granted before the grant of generation licenses, the provision which regulates nullity in case of share transfers shall be mitigated.

Footnotes

1. Official Gazette 3 March 2002, Nr. 24335 Reiterated.

2. Official Gazette 27 November 1994, Nr: 22124.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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