US embassy cable - 05ANKARA4480

UNCLAS SECTION 01 OF 02 ANKARA 004480 
 
SIPDIS 
 
STATE FOR E, EB/CBA, EB/ESC AND EUR/SE 
USDOE FOR CHARLES WASHINGTON 
USDOC FOR 4212/ITA/MAC/CPD/DDEFALCO 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ENRG, EINV, TU 
SUBJECT:  TURKEY AMENDMENTS MAY CURB INVESTOR APPETITE FOR 
TURKISH ELECTRICITY DISTRIBUTION NETWORK 
 
Ref: Ankara 3223 
 
Sensitive But Unclassified.  Please handle accordingly. 
 
1. (SBU) Summary: Long awaited Government of Turkey (GOT) 
amendments to the Electricity Market Law, aimed to set the 
guidelines for the upcoming sale of the Turkish electricity 
distribution network, were delayed to October.  The GOT made 
a last-minute move to pass particular articles of this 
amendment before the recess, by including them in the 
separate Law Regulating Privatization Implementation.  The 
GOT's unexpected granting of internal distribution rights to 
the organized industrial zones and calling for state 
ownership of new investments in the distribution network may 
give potential investors concern.  End Summary. 
 
2. (SBU) The draft amendment to the Electricity Market Law 
(Reftel), intended to clarify details for the electricity 
distribution network sale, was sent for Cabinet signature in 
June.  However, the legislation did not move out of the 
Parliamentary commissions before the recess in July, so the 
amendment has been delayed to the next legislative period 
starting in October.  The GOT unexpectedly attached some 
related amendments to the separate Law Regulating 
Privatization Implementations passed on July 2003.  The GOT 
had withdrawn these articles from the original Electricity 
Market Law draft, given negative reaction from the Energy 
Market Regulatory Authority (EMRA) and the private sector. 
The newly passed amendments include the following: 
 
-- Ownership of investments made to improve, strengthen, and 
expand electricity distribution facilities after 
privatization will belong to the government. 
 
-- Investment plans and implementation, as well as the 
management of the electricity distribution facilities, will 
be subject to EMRA's approval and supervision. 
 
-- Organized Industrial Zones (OSB) will have the right to 
generate, distribute and trade electricity in their own 
defined regions.  (Note: In addition to promoting investment 
in certain regions, the GOT encourages investment in special 
production areas like the OSB's to ensure better standards 
in environmental protection, cultural preservation, and 
earthquake resistant construction. End Note.)  The special 
companies established in OSB's to provide these services 
will treat the OSB members as independent consumers, and 
their sales price to these consumers cannot exceed the 
market rate.  The Turkish Electricity Distribution Company 
(TEDAS) will transfer the ownership and operating rights of 
the distribution network in these areas to the OSBs. 
 
-- Private distribution companies can establish generation 
facilities without any limitation, in addition to their 
distribution or retail activities.  These companies can buy 
electricity from their own generation facilities, but cannot 
pay a higher rate than the prevailing market rate. 
 
3. (SBU) EMRA Electricity Market Department Head Murat 
Erenel told Econoff and Econ Specialist on July 20 that EMRA 
was disappointed with the last-minute changes passed by the 
GOT.  Erenel noted that the GOT had withdrawn the article on 
OSBs and the one enabling vertical integration earlier, but 
inserted both articles in the separate Law Regulating 
Privatization Implementations on July 3.  Erenel criticized 
the generation, trading and distribution rights given to 
OSBs, which accounted for up to 70 percent of consumption in 
less developed areas.  Erenel asserted that this change 
would reduce the chance of privatizing the distribution 
facilities in Eastern and Southeastern Turkey.  The domestic 
industrial sector got what they wanted with this law, 
according to Erenel, at the potential cost of losing a 
successful privatization with higher revenue.  Erenel had 
previously criticized the GOT's intention to lift the 20 
percent limit on energy generation controlled by the 
distribution companies, on the grounds that giving the right 
to generate and distribute electricity to the same company 
in a certain region would inhibit competition.  In press 
accounts EMRA criticized the GOT's decision to retain 
ownership of investments after privatization, which EMRA 
believes will strengthen State electricity distribution 
company TEDAS' involvement in the sector as a landlord 
closely following the new investments made on its property. 
 
4. (SBU) Econ Specialist contacted Dr. Fatih Hasdemir, the 
Privatization Administration (PA) Group Head for Electricity 
Distribution on July 28, to receive the PA's perspective on 
the recent developments.  Dr. Hasdemir confirmed that the 
recent exclusion of OSB's from the distribution portfolio 
would negatively affect PA's revenue projections.  Hasdemir 
noted that the new amendments in fact clarified previous 
ambiguities with respect to the distribution rights in the 
OSB legislation.  Commenting on the unlimited trading rights 
given to distribution companies generating electricity in 
the same region, Hasdemir pointed out the "prevailing market 
rate" limitation, which he believed would prevent anti- 
competitive practices. 
 
5. (SBU) Comment: In an effort to successfully and in a 
timely way conclude big privatizations in its portfolio, the 
GOT has been trying to prevent possible attacks that may 
come from privatization opponents.  We believe the 
industrial zones' carve-out from the privatization portfolio 
and the ownership of the post-privatization investments 
remaining with the GOT may negatively affect investor 
interest.  After these changes, investors are likely to 
focus their interest in the Turkish distribution network in 
the more developed, industrial areas in western Turkey.  The 
GOT may end up keeping the eastern regions, which exhibit 
the highest investment needs.  The eastern regions are 
perceived as less profitable, and carving out the OSB's will 
make them even less interesting to potential investors.  We 
note that that the future status of the distribution company 
TEDAS after privatization remains ambiguous.  We have seen 
press reports that the GOT is seeking to reduce access to 
international arbitration which would be another negative 
factor for investors, especially in light of past flip-flops 
by the GOT with respect to BOT's and TOR's and the alphabet 
soup of tried and (often) failed models for seeking 
investment. 
 
 
McEldowney