US embassy cable - 05ANKARA4786

UNCLAS SECTION 01 OF 02 ANKARA 004786 
 
SIPDIS 
 
EXIM FOR PAMELA ROSS AND MARGARET KOSTIC 
OPIC FOR R CORR AND C CHIS 
USDOE FOR CHARLES WASHINGTON 
USDOC FOR 4212/ITA/MAC/CPD/DDEFALCO 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ENRG, EINV, BEXP, TU, EXIM, OPIC 
SUBJECT:  COURT RULING THREATENS TO SUSPEND TURKISH POWER 
PLANT OPERATIONS 
 
Sensitive But Unclassified.  Please handle accordingly. 
 
1. (SBU) Summary: In a surprise ruling in late July, the 
Council of State (Danistay) issued a suspension ruling for 
the Electricity Sales Agreement of Enka's Izmir power plant. 
Enka is optimistic that the court ruling will be overturned, 
given the power plant's significant share in Turkey's 
electricity generation, as well as the price and purchase 
guarantees in its contract.  In addition to the minor share 
U.S. Intergen has in the Enka power plant, OPIC and EXIM 
have credit exposure related to the three Enka "BO" plants. 
Although likely to be resolved, this problem sends another 
negative message to potential foreign investors that rules 
are subject to arbitrary risk in the Turkish market.  End 
Summary. 
 
2. (SBU) The Public Management Development Center (KIGEM), 
run by long time anti-privatization gadfly Mumtaz Sosyal, 
filed a lawsuit against the State Electricity Trading 
Company (TETAS) regarding the Electricity Sales Agreement 
(ESA) of Enka's Izmir power plant signed in 1998, on the 
grounds that this ESA qualifies as a concession contract and 
should be reviewed by Danistay.  After several years of 
dismissal and reversals by various administrative courts, 
the case made its way to Danistay, which ruled on July 10 
that the implementation of the ESA be suspended until 
Danistay reviews the agreement.  In principle, the power 
plant would have to suspend its operations if TETAS is 
unable to overturn the Danistay ruling in time.  The Izmir 
plant, like two other natural gas fired Enka plants in Gebze 
and Adapazari, was established on a Build-Operate (BO) 
basis. 
 
3.  (SBU) The three power plants, which account for 20 
percent of Turkey's total generation capacity, have been 
model projects for the GOT, due to their stable generation 
practices and low prices-- unlike the higher-priced Build- 
Operate-Transfer (BOT) plants, which have been on the GOT's 
black list for years.  U.S. Intergen currently has a 10 
percent share in the three Enka power plants, but is 
planning to sell its remaining share to Enka by the end of 
2005.  OPIC and EXIM exposure in the power plants will 
likely continue after Intergen's withdrawal.  KIGEM filed 
similar lawsuits against other four other BO projects in 
Turkey, so the Izmir case could form a problematic precedent 
if the Danistay overturns the Izmir plant's agreement. 
 
4. (SBU) Enka believes it is well protected by its contract 
with the GOT, which includes price and purchase guarantees. 
Relevant GOT agencies (Turkish Pipelines Company BOTAS and 
the Treasury) submitted opinions supporting TETAS' objection 
to the Danistay ruling.  Enka officials told us TETAS would 
not be able to replace the electricity it buys from Enka's 
plant if the suspension were to be implemented, putting 
Izmir at risk of black-outs.  BOTAS is the sole take or pay 
supplier of the Enka plant and it has related international 
liabilities to its gas suppliers.  The Treasury is bound by 
a "take or pay" clause in the agreement, and would have to 
pay for the electricity the plant could generate, even if 
the ruling would suspend the plant's operations.  Given the 
united support by all related GOT agencies, both Enka 
officials and Embassy contacts are optimistic that the 
Danistay ruling can be overturned (or ignored). According to 
the ruling, TETAS would have to implement the suspension by 
August 22, if it fails to overturn it by that time.  Embassy 
contacts believe a likely Council of Minister ruling could 
permit the Izmir Plant to continue its operations "for 
public benefit," thereby annulling the Danistay ruling. 
 
4. (SBU) COMMENT:  WE ARE OPTIMISTIC THAT ENKA PLANTS' 
OPERATIONS IN TURKEY WILL CONTINUE WITHOUT INTERRUPTION, 
GIVEN THE UNUSUAL SHOW OF UNITY OF GOT AGENCIES IN SUPPORT 
OF THESE FACILITIES AND RECOGNITION OF TURKEY'S DEPENDENCE 
ON THESE AND OTHER BO'S FOR CRITICAL ELECTRICITY SUPPLY. 
HOWEVER, THE DANISTAY RULING SENDS YET ANOTHER NEGATIVE 
MESSAGE TO POTENTIAL INVESTORS IN TURKEY: BEWARE LEGAL 
RISKS, UNCERTAINTIES AND UNFORESEEN CHALLENGES OR CHANGES IN 
THE RULES.  WHILE THE GOT HAS APPLIED PRESSURE ON HIGHER 
PRICED BUILD-OPERATE-TRANSFER (BOT) PROJECTS, THEY CONTINUE 
TO PURCHASE THEIR ELECTRICITY OUTPUT PER GUARANTEED 
CONTRACTS. 
 
McEldowney