Turkey: Unbundling Within The Electricity Market And The EMRA Resolution On Legal Unbundling

Last Updated: 26 February 2013
Article by Revan Sunol

Introduction

"Procedures and Principles concerning the Legal Unbundling of Distribution Systems and Retail Sales" was published within the Official Gazette dated September 27, 2012 and numbered 28424 within the scope of The Energy Market Regulatory Authority ("EMRA") Resolution dated September 12, 2012 and numbered 4019 ("Resolution"). Within the Resolution, the principles and procedures concerning the operation by undertakings holding a distribution license of distribution systems and retail sales under separate legal entities have been set forth.

The Notion of Unbundling

Unbundling within energy markets refers to the unbundling of vertically integrated structures. The unbundling of generation, transmission, distribution and retail sales has an important role within the electricity market with regard to the implementation of competition. The inclination towards the unbundling of the transmission and distribution operations, which are referred to as network operations and which carry natural monopoly characteristics, from generation and retail sales activities, is based on the concern that the dominant undertaking may limit in various ways the access of other undertakings that it is competing with in generation and retail sales areas. The mechanism referred to as vertical unbundling aims to provide the access of all players to distribution and transmission systems without discrimination and the prevention of cross subsidization between undertakings conducting generation, transmission, distribution and retail sales activities.

Unbundling within the electricity market may be realized as unbundling of accounts, legal unbundling and ownership unbundling. Unbundling of accounts provides for the independent accounting for separate operations. Legal unbundling on the other hand, provides for the organization of different activities under different legal entities. However, this does not prevent such different activities from being owned by the investment group. Ownership unbundling, to the contrary of legal unbundling, requires the unbundled assets and activities to not be owned by the same investment group.

Unbundling in the European Union

Competition within the electricity market in the European Union is regulated with the Directive 2009/72/EC of the European Parliament published within the Official Journal dated August 14, 2009 concerning rules for the internal market in electricity ("Directive 2009/72/EC"). Directive 2009/72/EC repealed Directive 2003/54/EC ("Directive 2003/54/EC") that was published in the Official Journal dated July 15, 2003. According to Directive 2003/54/EC, in the case of vertically integrated undertakings, transmission and distribution systems operators within such undertakings were required to be organized under different legal entities with independent decision making mechanisms. The said Directive emphasized the importance of the independent functioning of distribution and transmission systems especially with regard to other players within the market engaged in generation and retail sales and stated that for this reason, transmission and distribution system operators must have independent management structures. In this context, parent companies were prohibited from giving instructions with respect to the day to day operations of the subsidiary. In addition to these, the unbundling and transparency of accounts were also accepted. However, it did not require ownership unbundling. Directive 2009/72/EC which is in force today on the other hand, accepts the method of ownership unbundling; setting forth that legal unbundling provided within the Directive 2003/54/EC did not implement effective unbundling with regard to transmission systems. According to the said Directive, the only way in which effective transparency and prevention of discrimination within the market can be implemented is the removal of the incentive for vertically integrated undertakings to discriminate, by the ownership unbundling of network operations and generation. Accordingly, the unbundling of distribution and transmission system operators has been required for vertically integrated undertakings.

Unbundling in Turkish Law

Unbundling in Turkish Law has been provided with various provisions of the Electricity Market Law numbered 4628 ("Law") and the Regulation on Electricity Market License ("Regulation") published in the Official Gazette dated August 4, 2002 and numbered 24836. Pursuant to the Regulation, license holding legal entities which conduct multiple operations within the market and/or which conduct the same operation in multiple facilities or areas are under the obligation of keeping separate accounts and books for each operation that is subject to license and for each facility or area as well as for operations that complete or that are required by a market operation and operations that relate to side products.

The Law on the other hand sets forth multiple provisions relating to unbundling. First of all, in line with the Regulation, legal entities holding multiple licenses and/or which conduct the same operation within multiple facilities must keep separate accounts and books for each operation subject to license and for each facility. It is possible for generation companies to participate in distribution companies; however, they are prohibited from establishing control over the distribution company.

Private distribution companies may establish generation facilities besides conducting distribution and retail sales activities under the condition that they obtain a license. However, in this case the accounts must be unbundled. In addition to this, the distribution company may purchase electricity from the generation company or companies that it is affiliated with for a purchase price that does not surpass the average wholesale price for the country.

Another fundamental unbundling rule brought by the Law provides that distribution companies shall realize generation and wholesale operations under separate legal entities as of January 1, 2013.

Within this context, according to the Resolution of EMRA, the legal unbundling for the conduct of distribution and retail sales operations realized by legal entities holding a distribution license under separate legal entities shall be realized in accordance with the provisions of the Turkish Commercial Code numbered 6102 ("TCC") relating to partial spin-off procedure. In accordance with the provisions of TCC relating to incorporation, a joint stock company shall be incorporated before commencing the partial spin-off procedure. The articles of association of the joint stock company that is to be incorporated in this context must include the clauses of purpose and subject, type of share certificates, transfer of share certificates, merger and amendment of the articles of association as set out within the provisions of the Regulation.

Under the TCC, in the case that a part of the assets is to be transferred by way of partial spin-off, a spin-off plan shall be prepared in writing by the relative company's board of directors.

Pursuant to article 165 of the TCC, in cases where there is a period exceeding six months between the date of the spin-off and the date of execution of the spin-off agreement or where there is a material change in the assets of the companies participating in the spin-off after the last financial statement, an interim financial statement shall be issued.

A copy of the spin-off agreement approved by the distribution company shall be submitted before EMRA within five business days following the conclusion of the agreement.

The shares of the acquiring, that is to say the newly incorporated company, shall be acquired by the shareholders to the company subjected to the spin-off procedure. The acquiring company and the company subject to the spin-off must have the same control structure until the finalization of the legal unbundling. However, pursuant to article 6, paragraph 3 of the Resolution, within generation and retail sales companies which have the same control structure as the distribution company; even if persons conducting duties as member of board of directors, general manager and assistant general manager are acting under different titles, managers and auditors that are authorized signatories and that hold duties equivalent to or higher than assistant general manager in respect of their powers and duties must consist of different persons as of January 1, 2013.

According to the Resolution, retail sales companies must apply to EMRA for sales license before December 15, 2012. Along with the application petition, the company's articles of association and shareholding structure shall also be presented to EMRA. Simultaneously with the retail sales company, the distribution company shall apply to EMRA for the revocation of the sales license. Applications made within this context shall be evaluated by EMRA and the sales license held by the distribution company shall be terminated to be valid as of December 31, 2012 and the retail sales company shall be granted a new license which qualifies as the continuation of the previous one to be valid as of January 1, 2013.

Finally, pursuant to the Resolution, unavoidable costs relating to the procedures and transactions required by the legal unbundling realized within the scope of the unbundling of distribution and retail sales shall be compensated by the tariffs applied to the distribution or the retail sales company, as appropriate. However, it is essential for these transactions to have been made with minimum cost. A report must be submitted to EMRA with regard to the costs demanded to be reflected on the tariff and such costs must be documented.

Conclusion

Within the electricity sector, it is essential that unbundling be realized within vertically integrated undertakings in order to support the entry of new players to the market and to prevent discrimination between undertakings within the market. The transition from unbundling of accounts to legal unbundling must be considered as an important step under Turkish Law, even if it is only with respect to distribution and retail sales.

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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