Turkey: Final Countdown For Privatization of Electricity Distribution Facilities

Last Updated: 30 November 2005

Perhaps the most challenging privatization project is due by the end of this year, as the privatization of electricity distribution facilities in 2005 is among Turkey’s undertakings to the IMF. Although a privatization in the electricity market was foreseen in the Electricity Market Law introduced in February 2001 (“EML”), the Government had some significant constraints to overcome. With unpleasant experiences in cancelled privatizations, the Government has been taking very cautious steps in order to ensure success in the final privatization of what has been the busiest year in the Privatization Administration’s (“PA”) history.

Unlike Erdemir, Türk Telekom and TÜPRAŞ, the PA was told that a block sale of distribution facilities was not possible. In March 2004, the Council of State rendered an opinion that as per Article 168 of the Constitution, natural assets and resources were under the ownership of the State and that the State had an exclusive right to operate these assets and resources. The Council of State considered electricity as within the scope of Article 168, and opined that for this reason a transfer of ownership would be unacceptable. This was in line with the EML, according to which private entities could only carry our electricity distribution activities if they had a license and such license could be valid up to 49 years.

On the contrary, the Electricity Market Regulatory Authority (“EMRA”) was clearly in favor of a transfer of ownership of distribution facilities. Its main argument was the successful privatizations of Bursagaz and Esgaz (natural gas transportation entities of Bursa and Eskişehir) by transfer of ownership. However, taking into account the difference between the electricity and natural gas sectors as well as the Council of State’s opinion, the Privatization High Council (“PHC”) opted for a hybrid model entailing both a transfer of operation rights (TOR) and a share sale for privatizing Turkey’s distribution facilities. Although this model would arguably generate lesser revenue than a block sale, the PHC chose to follow a more legally sound structure.

As a result of the hybrid structure set up for this privatization, 21 companies (including the already private distribution company of Kayseri) were incorporated throughout Turkey and licenses were granted to these companies to conduct electricity distribution activities in 21 separated distribution regions.1 In addition, a TOR Contract2 will be signed between each of the 21 distribution companies and TEDAŞ3 (the Turkish Electricity Distribution Corporation) for terms equal to the terms of the relevant companies’ distribution licenses.4 The privatization will occur through the sale of these companies’ shares to private entities.5

Having determined the privatization method, the next step was to amend the legislation in order to enable a smooth transition into a liberal market. In July 2005 the EML was amended so as to address the ownership and monitoring aspects of electricity distribution facilities. According to the amended Article 2(4) of the EML, ownership of all investments made for improvement, enhancement and development of electricity distribution facilities following the privatization process will belong to the State.6 The EMRA, on the other hand, will be responsible for all approvals, modifications and supervision in connection with any operations, investment planning and approvals concerning privatized distribution facilities and assets. In the event that no offers are made for investments that would enable the provision of required services, the EMRA will be entitled to demand such services and where approved investments are not realized, the relevant entity’s license will be revoked and a new tender will be held.

Furthermore, the 20% limit applicable to generation activities of distribution facilities has been abolished. Prior to July 2005, a distribution company could conduct generation activities but the amount of electricity generated could not exceed 20% of the previous year’s electricity consumption in the particular region. In addition, distribution companies could not purchase from their subsidiaries more than 20% of their total electricity distribution in the previous year in that particular region. The newly introduced amendment enables private distribution companies to freely purchase electricity from their subsidiary generation companies in return for a price that would not exceed the country’s average retail electricity sales price. There is no longer a 20% limit. A Vice-President of the PA stated at a conference in Ankara in July 2005 that this amendment was adopted in order to encourage more investment by private entities that will takeover and operate distribution facilities.

These amendments were only part of the legislative preparations required for a healthy privatization in the electricity market. The Parliament’s recess between July and October delayed the process. Amendment of provisions concerning tariffs and the transition period are still outstanding, although expected by the time this Newsletter reaches our readers. A draft law has been prepared and submitted to the Parliament. According to officials, the Parliament should pass the bill by the end of October.

The bill for amending the EML introduces a price equalization mechanism for transitional contracts. Accordingly, a fixed price will be applied during the transition period, which will be five years.7 The purpose of this equalization mechanism is to avoid price differences that may arise as a result of differing distribution tariffs. This issue is likely to be taken up within the scope of a special regulation or communiqué.

Expropriation is also a significant aspect in this privatization process, by virtue of Article 168 of the Constitution as explained above. The bill addresses this issue by authorizing the EMRA to expropriate immovable properties upon the request of licensed distribution companies. In such event, the requesting license holder will pay the expropriation fee. Ownership of the immovable property will belong to the relevant State entity that owns the relevant distribution facility or the Treasury if the former does not exist; whereas the private distribution company will be granted an easement over the property. Apart from expropriation, distribution companies (as well as generation companies) may apply to the EMRA for a usufruct right or lease over immovable property owned by the State, in order to develop and/or use such property for electricity generation and distribution facilities. Such usufruct rights or leases can only be valid until the end of the term of the private entities’ licenses.

The bill clearly allows foreigners to have a majority share in companies active in the electricity distribution market. However, in order to ensure competition the bill states that they cannot own so many shares that would enable them to control the market. We understand that American, Russian, German, British and Canadian firms have expressed interest in this privatization.

According to the press, the following six regions are first in line for privatization targeted in November 2005:

  • European side of Istanbul
  • Anatolian side of Istanbul
  • Ankara
  • Edirne
  • İzmit, Sakarya, Bolu and the Gulf
  • Meram, Konya

The PA’s announcement regarding the privatization of electricity distribution facilities is expected before November. It is likely, if not certain, that our next edition will include an article on the results of the first phase of this privatization.

Footnotes

  1. Each region consists of 5-6 cities.
  2. The draft model TOR contract has been prepared by the PA and reportedly will be finalized upon obtaining the opinions of relevant governmental bodies.
  3. Türkiye Elektrik Dağıtım A.Ş.
  4. The 21 distribution companies will also enter into energy sales agreements (ESA) with TEDAŞ or other generation companies for the purchase or electricity.
  5. Reportedly, the World Bank criticized the number of distribution regions being 21. At a meeting held with the Ministry of Energy and Natural Resources, the PA, the EMRA and the Undersecretariat of Treasury on 10 October 2005, the World Bank mission noted that foreign companies may not be interested and the privatization proceeds may be low if the number of distribution regions is as high as 21; and that the most ideal number of regions would be no more than six.
  6. TEDAŞ will be the asset-holding company maintaining the State’s ownership of the natural assets and resources over which the facilities are built. This is the rationale behind the execution of TOR contracts with each distribution company.
  7. According to the bill, this five-year term may be extended for a further three years if necessary.

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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