Turkey: On the Verge of Real Competition in Electric Distribution

Last Updated: 12 June 2006
Article by Zeynep Lale

The Turkish Parliament’s discussions on the long awaited feed in law for the amendments to the Electricity Market Law No: 4628 have been finalized and the Law on the Amendment to the Electricity Market Law No: 5503 ("Amending Law") has been enacted on 24 May 2006. Studies for the Amending Law had been initiated by the Parliament upon the acceptance of the High Planning Board’s decision on the Strategy Paper Concerning Electricity Market Reform and Privatization ("Strategy Paper") drawing the map for the privatization of production and distribution sector. The Strategy Paper touches upon various issues such as privatization of distribution assets and power plants, transitional contracts and security of supply. According to the Strategy Paper, (i) privatization activities will be performed by the Privatization Administration; (ii) participation of financially strong companies able to achieve the objectives and principles of the program will be encouraged; (iii) legislation will be modified to accelerate and facilitate privatization of generation and distribution; (iv) privatization will start from the distribution sector and generation will be privatized after completion of the privatization of distribution; (v) privatization approach will take existing public liabilities into account and will not permit additional state guarantees; and (vi) Turkish Electricity Transmission A.S. ("TEIAS"), which is the transmission system and market operator; will remain in state ownership.

The Amending Law, which has been drafted in order to implement the above-mentioned Strategy Paper, aims the smooth transition to the targeted market structure and removal of the problems arisen during previous applications, simplification of the privatization procedure and prevention of problems during the pre and post privatization process. The Amending Law further provides alignment with the EU legislation with respect to safety of supply in the electricity market.

Within the scope of privatization of distribution facilities, status of the generation facilities connected to distribution and transmission lines have been clarified by amending the definition of transmission facility. Accordingly, all facilities, including medium voltage feeders of transmission switchyards, from connection points of generation facilities with a voltage level of above 36 kV to points of distribution facilities are deemed as transmission facilities. Furthermore, requirement for all the shares to be registered has been abolished for the liberalization of obligations stipulated for the market players. Under the same amendment clause, the public companies having solid financial standing are also encouraged to participate in privatizations. In line with the proposals of the Strategy Paper, a new definition of "other public production companies" has been added in order to include the production portfolio groups and affiliates, which are proposed to be established according to the Strategy Paper. The Amending Law enables the industrial zone management companies to perform generation and production of electricity through licenses granted by the Energy Market Regulatory Authority ("EMRA"). Furthermore, in order to ensure the fulfillment of the framework set out by the EML and establish a milder mechanism therefor, the Amending Law puts forward a cure period to be given to the violating party before imposing pecuniary fines.

One of the major points of the Amending Law is the empowerment of the EMRA with the authority to resolve the applications related to the expropriations. The applicant license holder shall pay the expropriation costs and expenses. In case of annulment of the licenses, these expropriation costs will not be returned to the license holder. The Amending Law with the aim of accelerating the procedures before the title deeds and alignment with the Civil Law proposes the establishment of easement rights on the publicly owned lands instead of restricted rights in rem. By the Amending Law, the electricity distribution companies can perform their activities within the territory of Turkish Electricity Distribution A.S. (TEDAS), State-owned distribution company, by operation rights transfer agreement to be signed with TEDAS.

A new temporary clause has been included in the Amending Law so as to find a remedy for the aggrieved parties of the Build Operate Transfer (BOT) agreements, some of which have given rise to arbitration proceedings. Accordingly, subsequent to termination of these agreements via mutual agreement of parties, if the contracting party holding license demands the sale of the related plants and facilities to himself, the latter will be sold to the same license holder through the market price. This has been one of the hot topics of the legislative debates before the Parliament. Another hot topic had been the removal of obstacles on the foreign investors to have controlling position on the distribution areas, provided that they will not have a controlling position in the market. This issue has not been touched upon in the wording of the Amending Law, which gives rise to continuing of the vague interpretation of foreign market players’ involvement in the sector.

The amendment paves the way for prevention of excessive discrepancy of tariffs throughout the regions occurring due to loss or smuggling of the electricity, by way of application of a "Cost Equalization Mechanism". The implementing regulations concerning application of this mechanism shall be adopted within 60 days as of the enactment of the Amending Law. This mechanism shall be applied in the transition period until 31 December 2006 and can be extended for one year, which can only be exercised three times. The rationale behind this amendment is the procurement of cost reflective prices, which is a prerequisite for ensuring private investment and efficient use of energy.

Despite the good legislative and regulatory framework, competition had not been developed in the electricity market since it has been difficult for the new entrants to compete with the state owned incumbents. The share of the liberalized market should be increased sooner than planned. It is therefore of essential importance for the Turkish Government to implement the above defined framework.

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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