US embassy cable - 03ANKARA6144

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 006144 
 
SIPDIS 
 
 
STATE FOR E, EB/CBA,EB/IFD, AND EUR/SE 
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR BRYZA 
DEPARTMENT PASS OPIC 
USDOE FOR CHARLES WASHINGTON 
 
 
E.O. 12958: DECL: 10/01/2013 
TAGS: ECON, ENRG, PREL, TU 
SUBJECT: REGULATORS COMPLAIN OF STIFF OPPOSITION TO 
ELECTRICITY REFORM 
 
 
REF: A. (A) ANKARA 5811 
     B. (B) ANKARA 5646 
 
 
(U) Classified by Econcouns Scot Marciel for reasons 1.5 
(b,d). 
 
 
 
 
 1. (C) Summary. Energy Market Regulatory Authority (EMRA) 
officials say Turkey's electricity reform program has stalled 
because the Prime Ministry, Energy Ministry, and Turkish 
Treasury have rejected EMRA's proposal to implement 
cost-based electricity tariffs, which are central to the 
electricity market reform effort.  EMRA officials maintain 
that this objection is based mainly on the Justice and 
Development Party's (AK) penchant for populism ahead of next 
year's local elections and the appointment of inept 
bureaucrats at key energy post.  Relations between the 
regulator and the government are tense, and EMRA officials 
fear the GOT could try to undermine EMRA's independence if it 
implements the regional tariff system without full government 
approval.  EMRA's strategy is to appeal to NGOs, the EU, and 
Washington to press Ankara for full implementation on energy 
reforms, the lack of which could have ramifications for 
privatization, World Bank funding, EU relations, and Turkey's 
energy supply security.  End Summary. 
 
 
2.  (C) In a September 26 meeting with Econoff, EMRA's 
Electricity Market Regulation, Monitoring, and Assessment 
Department Heads Murat Erenel and Seckin Ulgen and Technical 
Expert Defne Gencer all expressed frustration with the 
governments' resistance to introducing a market-based 
electricity pricing structure that would bring the energy 
sector in line with the EU acquis by 2004.  Under the 
proposed regional tariff system, 78 percent of industrial 
users would face lower electricity costs, but households in 
underdeveloped areas would suffer.  Turkish Treasury and the 
Energy Ministry are required to prepare a support scheme to 
ease the transition for consumers in poor rural areas; 
however, EMRA told us that both have refused to cooperate. 
 
 
3.  (C) Prime Minister Erdogan's public statement in 
Diyarbakir that there would be no regional tariff system and 
that higher electricity tariffs would never be brought back 
to the Council of Ministers' agenda were deemed to be 
particularly unhelpful, although his comments presumably 
played well with the AK's grassroots ahead of local 
elections, currently scheduled for April, 2004.  EMRA 
officials bluntly stated that the AK Party had made promises 
before it took office and is eager to implement populist 
policies rather than risk losing votes by introducing higher 
tariffs in underdeveloped regions.  They also noted the lack 
of understanding of the energy reform process among newly 
appointed bureaucrats as another reason for the disconnect, 
and lamented the loss of institutional memory at key energy 
posts at the State Electricity Transmission Company (TEIAS), 
the Electricity Generation Company (EUAS), the Turkish 
Electricity Contracting Company (TETAS), and the Ministry of 
Energy. 
 
 
4.  (C) In accordance with Article 17 of Electricity Market 
Tariffs Regulation, the deadline for submission of the tariff 
schedule to EMRA for Board approval is the end of October 
every year; approved tariffs would then be effective January 
to December of the following year.  Thus, if the October 
deadline is missed, the entire evaluation and approval 
process would have to be delayed until the 2005 budget cycle, 
and the transition to establishing a cost-based pricing 
system would be further postponed. 
 
 
5.  (C) Despite the setback, EMRA officials have strong 
incentives to eventually move forward with the tariff 
regulation schedule to foster energy sector privatization in 
accordance with the economic reform program, to bring the 
energy sector in line with EU standards, to safeguard World 
Bank funding, and to ensure Turkey's longer-term energy 
security.  They argue that companies interested in purchasing 
electricity generation rights or distribution companies 
require guarantees that there will be a market-oriented 
structure with cost-based pricing to secure financing and 
ensure fair market returns. The distribution rights to the 
Kayseri region were sold this year, but the other 32 
distribution grids are still in the hands of the 
Privatization Authority.  Although the EU has given Ankara 
credit for issuing the necessary legislation for energy 
reform, without a free market structure Turkey probably will 
not be able to raise the level of eligible customers 
(consumers who have the right to pick the supplier of 
electricity) from the current 9 million KW/h to meet the EU's 
2007 target for giving all households the freedom to choose 
suppliers.  Ankara also could have compliance problems with 
South East Europe Energy Market agreements. 
 
 
6.  (C) Privatization of energy distribution sytems and the 
introduction of cost-based pricing for electricity are 
preconditions for the disbursement of the remaining $375 
million of the World Bank's $759.6 million May 2002 Economic 
Reform Loan.  World Bank officials currently visiting Turkey 
say that the loan probably will be delayed.  EMRA expects 
Turkey to have an energy surplus until the fourth quarter of 
2007 and first quarter of 2008. Demand growth, however, is 
expected to surpass generation in 2008, and the surplus could 
become a deficit if new investments are not undertaken by 
2004 to allow sufficient time for construction and licensing. 
 EMRA officials stressed that both investors and creditors 
want to see the free market functioning before supporting any 
investments in Turkey. 
 
 
7.  (C) Relations between EMRA and the government remain 
tense, given the high stakes surrounding the tariff issue, 
and the regulator has been subject to harsh criticism, 
especially from the Energy Ministry and the Prime Minister. 
EMRA has the legal authority to implement the regional tariff 
system, but fears the government could try to undermine its 
independence if it moves forward without full approval.  EMRA 
officials claim the pending Petroleum Market Law poses a 
threat to its existence as well. The Council Of Ministers 
recently discussed establishing a separate board for 
petroleum, but most ministers supported the idea of adding 
petroleum to EMRA's portfolio.  From EMRA's perspective, this 
gives the government an opportunity to appoint new 
anti-reformist members to the Board and to change EMRA's 
mission over time. 
 
 
8.  (C) EMRA's handling of the BOT companies (Reftels A, B) 
also has strained relations with the Energy Ministry.  EMRA's 
extension of the deadline for BOT companies to apply for 
operating licences drew sharp criticism. EMRA officials 
believe that these companies will be part of the functioning 
electricity market over time and will voluntarily give up 
doing business with the government as the single buyer.  EMRA 
claims that the Energy Ministry wants to use licences as 
leverage to secure a reduction of electricity prices from the 
companies. 
 
 
9.  (C) EMRA officials reminded econoff that energy market 
reform also is part of Turkey's economic reform program, 
while noting that the government must be held accountable for 
sectoral reforms.  EMRA appealed to the Embassy to raise the 
slow pace of electricity market reform with Foreign Minister 
Gul and Finance Minister Unakitan, both deemed to be 
influential members of the Council of Ministers, who could 
push these reforms back on the government's agenda. EMRA also 
plans to contact NGOs and the EU to press Ankara for the full 
implementation of energy reforms. 
 
 
10.  (C) Comment: EMRA officials have been expressing 
frustration to us for months over problems with the 
government, which continues to see electricity prices through 
a political prism.  Just recently, Prime Minister Erdogan 
bragged that the government had avoided raising electricity 
costs (despite a need), and government ministers continue to 
talk about possible electricity subsidies to industry.  End 
Comment. 
EDELMAN