US embassy cable - 02ANKARA8594

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 008594 
 
SIPDIS 
 
 
STATE FOR E, EB/CBED, EB/IFD, AND EUR/SE 
DEPARTMENT PASS OPIC FOR ZAHNISER AND J. WILLIAMS 
NSC FOR BRYZA AND QUANRUD 
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
USDOC FOR 6110/TD/BI/OEIM/MBEEMAN 
USDOE FOR PUMPHREY/ROSSI 
TREASURY FOR OASIA 
 
 
E.O. 12958: DECL: 11/20/2012 
TAGS: EINV, ENRG, ECON, PREL, TU 
SUBJECT: UNCERTAINTY FOR PENDING AND EXISTING BOT/TOR 
PROJECTS IN TURKEY 
 
 
REF: A) ANKARA 4740 B) ANKARA 3892 
 
 
Classified by DCM Robert Deutsch; reasons:  1.5 (b,d). 
 
 
1. (C) Summary and comment:  Embassy has long emphasized to 
the GOT the importance of a rapid and fair settlement to the 
pending BOT/TOR projects, which still have not been resolved 
(reftels).  It now appears the GOT is considering 
re-negotiation of the contracts for the BOT projects that are 
already in operation, including U.S.-owned companies Trakya 
Elektrik (Enron) and Doga Enerji (Edison Mission).  Trakya 
and Doga have filed suit against the government, claiming 
that recently announced regulations are in violation of their 
contracts, and are intended to force the companies to lower 
their prices.  As we engage the new government on economic 
matters, we will couple our support for their overall energy 
liberalization efforts with an emphasis on the importance of 
contract sanctity. 
 
 
Existing BOT Projects Fear Contracts Will Be Reopened 
--------------------------------------------- -------- 
 
 
2. (C) A year after being established, the Energy Market 
Regulatory Authority (EMRA) is still grappling with how to 
handle the pending build-operate-transfer (BOT) and 
transfer-of-operating rights (TOR) energy projects. 
Unfortunately, EMRA is also now reevaluating the six BOT 
projects that are already in operation, which include the 
U.S.-owned, OPIC-financed energy companies Trakya Elektrik 
(Enron) and Doga Enerji (Edison Mission).  (Note:  Enron's 
share in Trakya Elektrik is reportedly being sold by the 
bankruptcy court in the U.S. on November 22). 
 
 
3. (C) Trakya Elektrik and Doga Enerji filed suit against 
EMRA on October 3, claiming that the electricity market 
regulations released by EMRA in August constitute a breach of 
their implementation contracts.  The companies have requested 
an injunction on implementation of those articles of the 
regulations that could ultimately affect their contracts. 
For example, the new regulations require all companies -- 
even those already in operation -- to apply for operating 
licenses.  The new regulation also stipulates that companies 
must adhere to all existing and future changes to the 
regulations, which Trakya and Doga claim opens their 
contracts to unilateral modifications. 
 
 
4. (C) Although EMRA President Yusuf Gunay told us the 
requirement for existing operators to apply for a license is 
a "formality," the BOT companies see it as a means for EMRA 
to reopen negotiations on the prices in the contracts. 
Various GOT officials have long claimed that the BOT prices 
for electricity are too high.  (Note:  the BOTs are charging 
in the range of 10-12 cents per kilowatt hour.  In 
comparison, the new Intergen BO plants charge in the range of 
4-6 cents per kilowatt hour.  End note.)  The BOT companies 
argue that their prices accurately reflect the level of risk 
and higher costs they faced when they signed the contracts in 
1993, and when they built the plants in the late 1990s. 
However, the companies assert (correctly, in our view), 
whether or not the GOT believes the prices are too high, the 
fact remains that these are the prices stipulated in the 
contracts signed by the GOT after years of negotiation. 
 
 
5. (C) Conversations with EMRA's legal advisor and others 
indicate that Trakya and Doga's suspicions that EMRA will 
reopen their contracts are not unfounded.  Ali Ulusoy, a 
university law professor, heads an independent commission 
enlisted by EMRA to provide recommendations on how to manage 
the roughly 100 pending and existing BOT, BO, and TOR 
projects as Turkey liberalizes its energy market.  Ulusoy 
emphasized to econoff that he believes the existing BOTs must 
reduce their prices, claiming that "otherwise we will not be 
able to move to a liberalized market."  Ulusoy stated that 
the BOT companies should be "willing to renegotiate" prices 
in the interest of supporting a free energy market in Turkey, 
which in the long-term should provide companies with more 
opportunities.  Responding to econoff's point that Turkey 
would likely pay in terms of decreased FDI if potential 
investors concluded that the GOT did not honor its contracts, 
Ulusoy responded that Turkey had "no other option" if it 
wanted to achieve a free energy market in the next several 
years. 
6. (C) The General Manager of Uni-Mar, one of the non-U.S. 
BOT companies, told econoff it was clear that EMRA's 
intention was to force the BOTs to cut their prices.  He said 
that even if there was room for some "flexibility" on the 
price issue, contractually the companies were under no 
obligation to renegotiate with the GOT.  For this reason, 
Uni-Mar joined Trakya Elektrik and Doga in their October 3 
lawsuits.  TETTAS General Manager Hayrettin Yildirim also 
told econoff the GOT wanted the BOTs to cut their prices. 
 
 
Meanwhile, No Progress on Pending BOT/TOR Projects 
--------------------------------------------- ----- 
 
 
7. (C) As reported Ref A, there has been no progress toward 
resolution of the pending BOT/TOR projects since former 
Ministers Cakan and Dervis committed in May to settle all 
pending signed contracts as soon as possible.  As of 
September 3, when the electricity market law went into force, 
EMRA took over responsibility for settling these projects. 
EMRA President Yusuf Gunay recently told emboffs he is still 
working on a strategy for managing the pending BOT/TOR 
contracts, noting that he believes EMRA should act as a 
"mediator" between the signators of the contracts, i.e. the 
companies and the Ministry of Energy.  However, Gunay, as 
well as legal advisor Ulusoy, made clear that the companies 
must be flexible on the issues of price and treasury 
guarantees. 
 
 
Role of the New Government 
-------------------------- 
 
 
8. (C) The AK party announced in its "emergency action plan" 
on November 16 that it would complete the pending TOR 
projects within one year.  According to several GOT and 
energy company officials, this policy is being driven by Afif 
Demirkiran, newly-elected AK parliamentarian and former 
General Manager of three of the pending TOR projects.  Some 
company representatives believe the election of Demirkiran 
bodes well for the BOT projects as well, since it would be 
difficult for the government to treat the BOT and TOR 
projects differently.  AK's emergency action plan also calls 
for opening the energy market to competetion and cutting 
electricity prices. 
 
 
9. (C) Turkish Electricity Trade and Contracting Company 
(TETTAS) General Manager Hayrettin Yildirim told econoff 
November 20 that Minister of Energy Guler had asked senior 
MENR officials for their recommendations on energy-related 
issues.  Yildirim, who previously headed Treasury's foreign 
investment office, had recommended the new government 
immediately announce its intention to honor all existing 
contracts, arguing that to do otherwise would do untold 
damage to Turkey's foreign investment climate.  Yildirim said 
his argument should resonate with the new minister, since it 
was actually in the interest of TETTAS -- which purchases 
electricity from the BOTs -- for the government to 
renegotiate the prices of the existing BOT projects and not 
to implement the pending BOT/TOR contracts.  Yildirim said 
the electricity from the six operational BOTs comprised about 
11 percent of all of TETTAS' electricity purchases.  Although 
the prices may be high by 2-3 cents per kilowatt hour, he 
estimated the total extra cost to the government (if it 
honored the contracts) would only be about USD 200 million. 
Yildirim said that was a small price to pay to avoid 
companies going to international arbitration and discouraging 
potential investors. 
 
 
Comment 
------- 
 
 
10. (C)  We have long emphasized to the GOT the importance of 
honoring its contracts; however, our focus has been primarily 
on the pending BOT/TOR projects (reftels).  It appears that 
some officials are now considering re-opening the contracts 
of the BOT projects that are already in operation.  We agree 
with AK that electricity is relatively expensive in Turkey; 
however, high prices are not only a result of the BOT plants 
-- the high price BOTAS pays and charges for gas, inefficient 
distribution networks, and low bill collection rates also 
play an important role.  Although it is not yet clear how AK 
intends to handle the pending or existing energy projects, we 
will emphasize to the new government that, while the U.S. 
supports establishment of a free energy market in Turkey, the 
GOT cannot expect to attract more foreign investment unless 
it honors its existing contracts, or adequately compensates 
investors when it cannot do so.  End comment. 
PEARSON