Turkey: Latest Status In Privitization Of Electricity Market

Last Updated: 1 October 2004
Article by Yeşim Api

Privatization in the electricity distribution sector and decreasing the number of electricity distribution districts have lately been popular discussion topics at meetings between the Energy Market Regulatory Authority ("EMRA") and other governmental authorities. The ultimate purpose is to create a liberal and competitive environment in line with the Electricity Market Law 1(the "Law No.4628").

According to recent news in the press, EMRA, the Ministry of Energy and Natural Resources ("MENR"), the Ministry of Finance and the Undersecretariat of Treasury have agreed to privatize the electricity distribution sector and to liberalize the market by increasing private sector involvement.

I. Background

The Turkish Electricity Distribution Company (Türkiye Elektrik Dağıtm A.Ş.) (“TEDAŞ”), was incorporated as a public economic enterprise in 1994 in order to operate the low voltage distribution network, in line with the program to encourage the private sector in electricity generation, distribution and transmission activities. TEDAŞ failed in its operations due to the illegal hook-ups to the low voltage lines under unmeasured consumption. The Government tried to tackle this issue by tendering electricity distribution companies under the transfer of operating rights model ("TOR"), through long-term concessions and private law contracts. Nonetheless, attempts to liberalize the market were not as successful as had been envisaged.

Following the World Bank’s criticism of the partial privatization model, the Council of Ministers has recently called for the cancellation of a large number of the TORs.

II. Amendments introduced with Law No. 4628

Following IMF and World Bank recommendations and due to the undertakings to the IMF under the Letter of Intent dated 18 December 2000, the Government has decided to accelerate the deregulation of the electricity sector and privatize State-owned power plants to attract domestic and foreign private capital. Accordingly, Law No. 4628 was enacted in 2001.

According to Law No.4628, distribution activities are carried out by TEDAŞ, its affiliates and subsidiaries2, and private sector distribution companies within the distribution districts where they have been authorized under their licenses. In addition, it is provided that the operating activities of the distribution companies will be carried out within the framework of the control of the national and/or district load distribution centers. Further, Law No. 4628 foresees that the privatization process of the electricity generation and distribution facilities will be carried out by the Presidency of the Privatization Administration ("PA"), in accordance with the Privatization Law No. 4046 3("Law No. 4046"). In this respect, the MENR will notify the PA of its views and suggestions regarding the assets to be privatized in the electricity distribution sector. This provision supercedes the other processes foreseen for the privatization in the electricity distribution sector4. Law No. 4628 does not allow foreign individuals and legal entities to acquire control over electricity generation, transmission and distribution sectors as a result of the privatization process.

Law No. 4628 also foresees privatization in the electricity distribution market, and encourages the entry of private investors into the electricity market, securing an amount of supply surpassing demand, reducing market risks, and instituting transparent market mechanisms through the establishment of a non-discriminatory and transparent transmission operator and an independent regulatory authority. This law, inspired by the European Union directives, is perceived as a difficult one to implement in the short term.

Under the Letter of Intent to the IMF dated 18 January 2002, the Turkish Government has undertaken that the MENR would inform the PA regarding the electricity distribution assets that would be privatized by March 2002, and that the pre-qualification tenders for the distribution companies would be launched by April 2002

Unfortunately, EMRA’s attempts for the start of privatization of electricity distribution always resulted in failure due to the faults in the collection system, high prices, economic crises etc. Furthermore, following the cancellation of the TORs, it seems like TEDAŞ, which is a public private company, will become the monopoly in the electricity distribution field. This has lead to chaos in determining the process for the privatization of distribution facilities.

III. Recent Developments

Due to the problems and high prices in the electricity distribution sector in recent years, it is believed that a transparent and competitive market where the market risks are minimized may be provided by privatization of the electricity distribution companies. Following the liberalization of the electricity distribution sector, it is assumed that electricity prices will decrease automatically. In addition, the legal and technical environment for the privatization of electricity generation facilities will be provided. Privatization of the electricity generation is contingent on the privatization of electricity distribution facilities.

However, as a first step in the privatization process, the number of electricity distribution districts is to be determined. According to the press, the interest of the private sector distribution companies could be drawn to the districts other than those including larger cities where the electricity-consuming ratio is higher if the number of electricity distribution districts are decreased. If the number of the electricity distribution districts could be decreased to 21 from 33, the cities where the electricity consuming ratios are lower than larger cities would be gathered in one district. Accordingly, equal conditions in the distribution districts and regional tariffs to be determined according to the conditions of the districts could ease the commencement of the privatization process.

At the World Bank Committee’s most recent visit to Turkey in February 2004, the Energy Strategy Report was prepared. According to the Report, privatization in the distribution facilities will not be started prior to 2005. This differs from the original intentions of the Turkish Government,. According to the press, the World Bank Committee requests Turkey to start the privatization process in the energy sector following the formation of the relevant legal and technical basis. In this respect, the privatization process of the distribution facilities will be carried out pursuant to Law No. 4046. The PA will prepare the privatization specifications and the process until the end of the 2004. In addition, the distribution and privatization tariffs will be determined for the next 5 years. The date for the privatization tender is estimated as 1 April 2005.

Footnotes

1. Published in the Official Gazette on 3 March 2001.

2. TEDAŞ currently has eight affiliates: (i) Istanbul Anatolian Side Electricity Distribution Coordinator; (ii) Trakya Electricity Distribution General Directorate, (iii) Meram Electricity Distribution General Directorate, (iv) Boğaziçi Electricity Distribution General Directorate, (v) Başkent Electricity Distribution General Directorate, (vi) Körfez Electricity Distribution General Directorate, (vii) Karaelmas Electricity Distribution General Directorate and (viii) Sakarya Electricity Distribution General Directorate.

3. Law No. 3096 on the Authorization of Entities other than Turkish Electricity Authority for the Electricity Generation, Distribution, Transmission and Trade foresees that the privatization will be carried out by MENR but not the PA.

4. Law No. 3096 on the Authorization of the Entities other than Turkish Electricity Authority for the Electricity Generation, Distribution, Transmission and Trade foresees that the privatization processes will be carried out by MENR but not the PA.

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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