Turkey: Privatization of Electricity Distribution Sees the Light

As our readers may recall from our Autumn 2005 edition, TEDAŞ1 was included in the privatization program to be carried out by the Privatization Authority ("PA"), together with the "Strategy Paper on Privatization and Reform in Electricity Energy Sector" of the High Planning Council dated 17 March 2004 and numbered 2004/3 and the decision of Privatization High Council ("PHC") dated 2 April 2004 and numbered 22. According to this PHC decision, the first phase of the privatization of State-owned electricity distribution facilities was expected to be completed before November 2005 and incorporation of twenty-one regional distribution companies, determination of performance standards, target deprivation-leakage percentages, income needs and tariff applications for each and every distribution region company was planned for completion before 31 March 2005. Under this assumption, 31 December 2006 was set as the prospective completion date for privatization of all distribution regions/companies.

The 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, twenty-one companies (including the already private distribution company of Kayseri) were incorporated throughout Turkey. A TOR Agreement will be signed between each of the twenty-one distribution companies and TEDAŞ for terms equal to the terms of the relevant companies’ distribution licenses. The privatization will occur through the sale of these companies’ shares to private entities.

Unfortunately, the aforementioned deadlines could not be met due to delays in amending the Electricity Market Law No. 4628 ("EML").2 Although a series of amendments, mainly related to the ownership of electricity distribution facilities and the monitoring of these facilities, were passed by the Parliament in July 2005, these were not yet sufficient to enable the PA to carry out a smooth privatization of TEDAŞ under the agreed hybrid model and, therefore, another set of amendments was transmitted to the Parliament in November 2005, mainly dealing with, among others, the electricity generation and distribution activities in organized industrial zones; the price equalization mechanism for transitional contracts; authorization of the Energy Market Regulatory Authority ("EMRA") to expropriate immovable properties upon the request of licensed distribution companies; and signing of transition period contracts regarding energy sale-purchase.

This latest set of long-awaited amendments was passed by the General Assembly of the Parliament by virtue of Law No. 5496 ("Amendment Law") on 10 May 2006 and entered into force on 24 May 2006.3

Organized Industrial Zones ("OIZ")

According to the amended Article 2(g) of the EML, OIZs may, without incorporating a company in accordance with the Turkish Commercial Code4, carry out electricity generation and/or distribution activities within their approved borders, for the purpose of meeting the demands of the companies operating within the relevant OIZ ("Participant Companies"). Contrary to the former provision, the Amendment Law expressly requires OIZs to obtain the relevant licenses from the EMRA to conduct such activities.

Previously, OIZs could not sell electricity to the "eligible consumers" within the approved borders of the OIZ for over the market price, whereas upon the latest amendment, OIZs are deemed as "eligible consumers", regardless of the level of consumption of the Participant Companies. Those Participant Companies that exceed the eligible consumer limit shall be entitled to choose their suppliers, provided that they pay a distribution fee to the OIZ.

Further, the Amendment Law provides that the ownership and operation rights of facilities located within the OIZ shall be transferred to TEDAŞ free of charge or in consideration of a symbolic fee, or to be returned to the relevant OIZ within a term of three months in return of the same symbolic fee. It is noteworthy that this seems to be an exception to the general rule that TEDAŞ will remain the owner of all distribution infrastructure facilities.

The principles and procedures applicable to the provision of electricity granted or supplied by an OIZ to the Participant Companies, determination of fees, the rules regarding distribution of electricity within the OIZ, including the sub-contracting of such service, and similar matters will be addressed in a regulation to be prepared by EMRA.

Hybrid Privatization Method

A new paragraph has been inserted into Article 14 of the EML stating that a TOR agreement may be signed among TEDAŞ and the twenty-one electricity distribution companies incorporated for the purpose of carrying out electricity distribution activities in the determined regions. This amendment further provides that the TOR agreement will concern the facilities and assets owned by TEDAŞ and required for distribution activities. The ownership of these facilities and assets shall remain with TEDAŞ, while the electricity distribution companies to be sold to private entities shall have the right to operate these assets and facilities throughout the term of their licenses.

Expropriation and Real Property Rights

The Amendment Law enables private entities licensed to carry out electricity generation and/or distribution activities, to request the expropriation of real properties. The EMRA, upon its evaluation of such requests, may proceed with the expropriation process if it deems the request appropriate, and provided that the expropriation costs and expenses are paid by the requesting private entity, i.e., private distribution company.

Upon payment of the expropriation fees, the real property, subject to an expropriation request, shall be owned by the State, whereas the private entity shall be granted, free of charge, a usage right valid until the end of its license term enabling it to use such real property for distribution activities. The amended Article 15(c) of the EML provides that expropriation costs and other facility investment expenses borne by the private entities shall be reimbursed by virtue of tariffs.

Furthermore, the amended Article 15(d) of the EML states that easement rights, usage rights or leases may be established over real property owned by the State, in favour of private entities carrying out electricity generation and/or distribution activities, upon the latter’s application, provided that the term of such real property right or lease shall be limited to the term of the latter’s license.

Price Equalization Mechanism

A new Provisional Article 9 has been inserted in the EML, prescribing adaptation and implementation of a temporary price equalization mechanism, which was one of the most significant factors holding back the privatization process.5 The principles and procedures thereto, as well as the duties and liabilities of the distribution companies holding retail sale licenses, shall be governed by a communiqué to be issued by the EMRA within sixty days following the enactment of Provisional Article 9, i.e., until 24 July 2006. However, there is no penalty foreseen if the EMRA fails to comply with this deadline.

Transition Period Agreements & Tax Benefits

According to the new Provisional Article 10, transition period agreements will be signed among TETAŞ6, EÜAŞ, distribution companies holding retail sale licenses, the groups formed as a result of the restructuring of EÜAŞ and public sector generation companies, the term of which is not determined by law contrary to the amendment draft and expectations. The rights and liabilities pertaining to such agreements shall belong to the licensees in parallel with the privatization of the distribution assets and such agreements shall be exempt from stamp tax.

Similarly, according to the newly added Provisional Article 12 of the EML, revenues arising from transfers, mergers, separation and partial separations to be realized until 31 December 2010 within the scope of the privatization of electricity distribution and/or generation facilities and/or companies shall be exempt from corporate tax.

Although there is still some criticism by both local and foreign investors mainly regarding the prequalification requirements prescribed in the pre-draft tender specifications, the recent Amendment Law seems to provide comfort to a certain extent and to trigger bid preparations for the privatization process of the initial regions. According to the PA, privatization announcements should be expected in late July.

Footnotes

1. Turkish Electricity Distribution Company (Türkiye Elektrik Dağıtım A.Ş).

2. Published in the Official Gazette dated 3 March 2001 and numbered 24335.

3. 43. Published in the Official Gazette dated 24 May 2006 and numbered 26177.

4. As OIZs themselves are established as joint stock corporations.

5. The transition period for implementation of the price equalization mechanism shall end on 31 December 2010. During this period, cross-subsidies shall be applied amongst subscriber groups.

6. Turkish Electricity Trading and Contracting Company.

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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