US embassy cable - 03ANKARA7442

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 007442 
 
SIPDIS 
 
 
STATE FOR E,EB/CBED,EB/IFD AND EUR/SE 
DEPARTMENT PASS OPIC, NSC FOR BRYZA, 
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
USDOE FOR CHARLES WASHINGTON 
TREASURY FOR OSIA 
 
 
E.O. 12958: DECL: 12/04/2013 
TAGS: ENRG, EINV, ECON, PREL, TU 
SUBJECT: ENERGY REGULATOR PESSIMISTIC ABOUT REFORM 
 
REF: A. ANKARA 6144 (C) 
     B. ANKARA 7103 
     C. ANKARA 7180 
     D. ANKARA 6538 
 
 
(U) This cable was classified by Econcouns Scot Marciel for 
reasons 1.5 (b,d). 
 
 
1.  (C)  Summary.  EconCouns met with Energy Market 
Regulatory Authority (EMRA) President Yusuf Gunay for an 
update on energy issues, including the pending Petroleum Law, 
electricity market reform, gas market reform, and 
Build-Operate-Transfer disputes.  Gunay had mixed feelings 
about the Petroleum Law, which gives EMRA the authority to 
regulate the market and requires all players to apply for 
licences.  Gunay believes that the government is using the 
Petroleum Law to stack EMRA's board with anti-reformists and 
undermine the board's autonomy so that all energy policies 
would be determined solely by the Ministry of Energy at the 
Prime Minister's behest.  In his view, Foreign Minister Gul 
is the only Cabinet member who supports energy market reform 
fully and understands that EMRA should remain independent. 
He was not hopeful that the pace of energy market 
liberalization would pick up, given the government's tight 
grip on policy issues and its insistence on keeping utility 
prices low.  Gunay stressed that privatization in the energy 
sector would be stalled because the GOT continues to block 
the implementation of regional electricity tariffs and 
protect the State Pipeline Company's (BOTAS) monopoly.  (End 
Summary) 
 
 
2.  (C)  On December 2, EconCouns and Econspecialist met with 
the EMRA's President Yusuf Gunay for an update on energy 
market reform.  Gunay was especially concerned about the 
pending Petroleum Law, which would necessitate a 
restructuring of the regulatory authority to add oil to its 
portfolio, in addition to electricity and natural gas.  If 
the legislation is approved in its current form, two new 
members would be added to EMRA's board for a total of nine 
members.  However, the term of service for two of the current 
board members has expired, so the GOT would effectively be 
appointing four new members to EMRA's board.  Gunay believes 
that a nine-member board would be ineffective and has 
appealed to the Council of Ministers to change the draft 
legislation and maintain the seven-member before the final 
vote.  Turkey's petroleum market is valued at about $25 
million in terms of volume, and the pending Petroleum Law 
will require all market players to apply to EMRA for licences. 
 
 
3.  (C)  Other contacts in the energy sector sector have told 
us that the GOT is manipulating EMRA's board by replacing two 
of the most effective members, Vice President Ali Turkoglu 
and Middle East Technical University academician Osman 
Sevaioglu on the pretext that their term of office has 
expired.  EMRA's board were all appointed at the same time 
for 6 years duty.  Since these are the first board members, 
EMRA's internal regulation requires two members, excluding 
the President, be replaced every year through random 
selection.  The new members will then serve for 6 years 
consecutively.  Our contacts believe that the GOT ignored the 
random selection process and forced out Turkoglu and 
Sevaioglu. 
 
 
4.  (C) Gunay said that the government wants to control the 
energy sector, and that the Prime Minister does not want EMRA 
to regulate the sector. As a direct consequence, Gunay said 
that EMRA is very careful and transparent with all of its 
activites to avoid mistakes, which would give the GOT an 
excuse to dismantle the board.  Reftel (A) discussed EMRA's 
concern that Petroleum Law would give the GOT an opportunity 
to appoint anti-reformists to EMRA's board and unduly 
influence EMRA's regulatory activities.   Gunay said that 
Foreign Minister Gul is trying to be helpful and Finance 
Minister Unakitan to a lesser extent. 
 
 
5.  (C)  Gunay was even less sanguine about the 
implementation of a regional tariff regime, which remains key 
to privatization of energy distribution systems.  Although a 
regional tariff regime is an essential part of a functioning 
electricity market to attract investors and yield lower 
electricity prices over time, the GOT continues to block 
implementation to curry favor with voters (ahead of local 
elections scheduled for March), many of whom would initially 
face higher electricity prices (reftel A).  Turkish Treasury 
and the Energy Ministry are required to prepare a supporrt 
scheme to ease the transition for consumers in rural areas; 
however, EMRA told us that both have refused to cooperate. 
Gunay believes that the government is unlikely to change its 
attitude, and this issue is no longer on the government's 
agenda.  Nonetheless, he expects that EMRA will be blamed 
when there are no new market participants and energy 
privatization stalls. 
6.  (C)  Under the proposed regional tariff system called for 
in the Electricity Law, 78 percent of industrial users would 
face lower electricity costs.  In anticipation of these lower 
costs, the Izmir Chamber of Industry has filed three 
complaints to the Danistay (Court of State) to force EMRA to 
introduce the regional tariff system, following delays in 
August, September, and October.  Currently, the customers in 
Izmir are using the national tariff system like all other 
consumers in Turkey, which means that they are paying for 
electricity leakages in other less developed parts of Turkey. 
 Given Izmir's industrial development and complex electricity 
distribution network, the cost-reflective regional tariff 
system, would lower costs significantly.  According to EMRA 
officials, the Danistay's ruling would be binding for EMRA, 
and Izmir would be able to use the regional tariff system 
over the GOT objections. If the court rules in favor of ITO, 
thios would open the door for other larger cities to follow 
suit. 
 
 
7.  (C)  Gunay was pessimistic about gas market 
liberalization, especially because BOTAS has not taken the 
appropriate steps to tranfer shares to the market and permit 
private entrants to enter the gas market. BOTAS is legally 
obligated to transfer 10 percent of its market share annually 
to reduce its total share to 20 percent by 2009 (reftel D). 
EMRA is planning to fine BOTAS for non-compliance bacause 
BOTAS remains unwilling to consider EMRA's proposals to 
facilitate gas market liberalization.  However, EMRA 
officials told us that the Energy Ministry plans to amend the 
Natural Gas Law to give BOTAS a way out.  According to Gunay, 
the GOT views the gas release contracts in terms of lost 
profits for BOTAS, not in terms of eliminating a monopoly and 
establishing a free market. 
 
 
8.  (C)  On BOTs (reftels B and C), Gunay said that the 
Energy Ministry is working with the companies to reach a 
solution. He said that they are closer to a buy-out option. 
He hinted that the BOT companies have told the energy 
authorities that the USG supports the buy-out option. 
EconCouns emphasized to Gunay our policy to encourage both 
sides to reach a fair solution, given the negative 
ramifications for Turkey's reputation as a host for foreign 
investment. 
 
 
9.  (C) Comment. The GOT lacks the political will to move 
forward with energy market reform. The GOT has shown its 
determination to curb EMRA's authority by circumventing the 
normal procedures to replace EMRA board members.  Given the 
fallout from the BRSA's handling of Imar Bank and the ongoing 
investigation of BRSA's former chair, EMRA's board members 
are likely to be more cautious, which could slow the reform 
process further. Both industry and consumers are benfitting 
in the short run with the GOT's policy not to raise utility 
prices for one year; however, the GOT cannot freeze prices 
for an extended period. End Comment. 
EDELMAN