Privatization of the Electricity Market: The Latest Instalment - International Law Office

Background
Amendments
Recent Developments

Recently, the Energy Market Regulatory Authority (EMRA) and other governmental authorities have conducted talks about privatizing the electricity distribution sector and reducing the number of electricity distribution districts. The overarching aim of the discussions is to create a liberal and competitive environment in line with the Electricity Market Law. According to the latest news reports, EMRA, the Ministry of Energy and Natural Resources, the Ministry of Finance and the Treasury Undersecretariat have agreed to privatize the electricity distribution sector and to liberalize the market by increasing private sector involvement.

Background

In 1994 the Turkish Electricity Distribution Company was incorporated to operate the low-voltage distribution network, in line with the domestic programme to encourage privatization in electricity generation, distribution and transmission. The company failed in its operations due to illegal hook-ups to low-voltage lines. As a result, the government chose to tender electricity distribution companies under the transfer of operating rights (TOR) model, through long-term concessions and private contracts. Nonetheless, attempts to liberalize the market were unsuccessful. Following the World Bank’s criticism of the partial privatization model, the Council of Ministers called for the cancellation of a large number of the TORs.

Amendments

Following International Monetary Fund (IMF) and World Bank recommendations (not to mention Turkey's undertakings to the IMF in its letter of intent of December 18 2000), the Turkish government decided to accelerate deregulation of the electricity sector and to privatize state-owned power plants with a view to attracting domestic and foreign private capital. Accordingly, Law 4,628 was enacted in 2001. The law states that:

• distribution activities will be carried out by the Turkish Electricity Distribution Company and its affiliates and subsidiaries, as well as private sector distribution companies within their licensed distribution districts;

• 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 centres;

• privatization of the electricity generation and distribution facilities is likely to be carried out by the president of the Privatization Administration in accordance with Privatization Law 4046. In this respect, the Ministry of Energy and Natural Resources will notify the administration of its views and suggestions regarding the assets to be privatized in the sector(this provision supersedes other privatization processes that were foreseen for the sector);

• foreign individuals and legal entities cannot acquire control over electricity generation, transmission and distribution sectors as a result of the privatization process; and

• privatization of the electricity distribution market is likely, and the entry of private investors into the electricity market is to be encouraged. As such, it is hoped that supply will surpass demand, market risks will be reduced, and transparent market mechanisms will be introduced through the establishment of a non-discriminatory and transparent transmission operator and an independent regulatory authority.

The law, inspired by various EU directives, is widely perceived as being difficult to implement in the short term. In a further letter of intent to the IMF of January 18 2002, the Turkish government stated that the Ministry of Energy and Natural Resources would inform the Privatization Administration of the electricity distribution assets to be privatized by March 2002, and that pre-qualification tenders for the distribution companies would be launched by April 2002. Unfortunately, EMRA’s attempts at privatization resulted in failure due to faults in the collection system, high prices, economic crises and the like. Furthermore, following the cancellation of a number of TORs, the Turkish Electricity Distribution Company (a public private company) appears set to enjoy a monopoly in the electricity distribution field. These factors have caused chaos in determining the process for the privatization of distribution facilities.

Recent Developments

Privatization of the electricity distribution companies is seen as one way of providing a transparent, competitive and relatively risk-free market. It is assumed that electricity prices will decrease automatically upon liberalization, and that the relevant legal and technical capabilities will then be in place for the privatization of electricity generation facilities. The number of electricity distribution districts must be determined as a first step in the privatization process. According to the press, the private sector may be more attracted to districts that do not include larger cities. An energy strategy report was prepared during the World Bank Committee's most recent visit to Turkey in February 2004. In opposition to the government's plans, the report states that privatization of the distribution facilities will not start before 2005. In addition, the committee would prefer privatization of the energy sector to commence only after the relevant legal and technical foundations have been laid. In this respect, privatization of the distribution facilities will be carried out pursuant to Law 4046. The Privatization Administration will prepare the relevant specifications and outline the process up to the end of 2004, and distribution and privatization tariffs will be set for the next five years. Currently, the proposed date for privatization tenders is April 1 2005.

For further information on this topic please contact Yesim Api or Kemal Mamak at Hergüner Bilgen Özeke by telephone (+90 212 310 1800) or by fax (+90 212 310 1899) or by email (yapi@hbo-law.com.tr or kmamak@herguner.av.tr).