US embassy cable - 03ANKARA416

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 000416 
 
SIPDIS 
 
 
STATE FOR E, EB/CBED, EB/IFD, AND EUR/SE 
DEPARTMENT PASS OPIC 
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: 01/16/2013 
TAGS: EINV, ENRG, ECON, PREL, TU 
SUBJECT: THE AK GOVERNMENT'S DOMESTIC ENERGY STRATEGY: 
WORK IN PROGRESS 
 
 
REF: A) ANKARA 8594 '02 B) ANKARA 7721 '02 
 
 
Classified by Econ Couns Scot Marciel, reasons 1.5 (b,d) 
 
 
1. (C) Summary and comment:  Two months into its 
administration, the AK Government has not yet clearly defined 
its domestic energy strategy, except to announce general 
support for liberalization and its desire to decrease 
electricity prices.  Although the Energy Market Regulatory 
Authority (EMRA) is now operational, there has been no 
progress on the privatization of energy assets since May 
2002.  EMRA is still grappling with the how to implement the 
electricity and gas market laws, while continuing to honor 
the government's long-term gas and electricity contracts. 
EMRA and the Energy Ministry want to cut prices by 
renegotiating contracts with the five BOT plants in 
operation, including U.S.-owned companies Trakya Elektrik and 
Doga Energi.  This approach likely will have a negative 
impact on the investor climate.  There has been no progress 
on the pending BOT/TOR projects, leading one U.S. company to 
file an arbitration case against the government.  We will 
continue to urge the government to honor existing contracts 
or reach mutually agreeable solutions with the companies. 
End summary and comment. 
 
 
Slow Progress on Market Liberalization 
-------------------------------------- 
 
 
2. (U) Prime Minister Gul, Energy Minister Guler, and other 
AK party officials have stated at various forums and to the 
press that cutting electricity prices will be one of the 
government's top energy priorities.  At a recent energy 
conference, Minister Guler set out three additional goals: 
creating a competitive environment through liberalization and 
transparency; giving priority to natural resources to 
mitigate the increasing role of imported fuels such as gas; 
and taking an environmentally responsible approach to energy, 
including promotion of renewable energy and new energy 
technologies. 
 
 
3. (SBU) Due in part to the difficulty of the task and in 
part to the change in government, progress on the 
liberalization front has been slow (note:  the electricity 
market law calls for liberalization to be completed by 
end-2003).  The electricity generation and distribution 
assets identified by the Ministry of Energy in May 2002 for 
privatization have not yet been taken into the scope of the 
Privatization Administration.  The Energy Market Regulatory 
Authority (EMRA) is still grappling with the mechanics of 
implementing the electricity and gas market laws.  The major 
task:  balancing liberalization with the long-term gas and 
electricity contracts to which the government is party.  The 
EMRA Vice-President for Electricity told us recently that, as 
long as the government is bound by long-term electricity 
purchase contracts, it will be impossible to attract new 
companies to the market.  On gas market liberalization, EMRA 
has not yet determined how BOTAS will transfer its long-term 
import contracts to the private sector. 
 
 
4. (SBU) On the positive side, EMRA is now fully operational. 
 It is receiving license applications and has started issuing 
operating licenses.  In December 2002, EMRA issued licenses 
for the main lignite, fuel oil, and natural gas plants owned 
by EUAS, the state generating company.  EMRA also announced 
the internal transmission tariff for natural gas, which will 
be based on the "postage," or flat-rate system.  The state 
transmission company, TEIAS, has developed a regional 
transmission tariff pricing scheme, and has made progress on 
the transmission network by acquiring USD 90 million worth of 
new transmission lines, which is being financed in part by a 
World Bank loan. 
 
 
Cutting Electricity Prices by Renegotiating Contracts 
--------------------------------------------- -------- 
 
 
5. (SBU) AK has made cutting electricity prices a top energy 
priority; however, because most of the costs are fixed, it 
will be a difficult goal to achieve without Turkish Treasury 
paying for it.  In its defense, AK inherited a multitude of 
problems that contribute to high prices, including an 
oversupply of gas purchased through expensive, long-term gas 
contracts; a number of relatively expensive electricity 
purchase obligations; an inefficient billing and collection 
system; and significant losses due to network leakage and 
pilferage. 
6. (C) Although EMRA Chairman Yusuf Gunay told us he resents 
the government meddling with electricity prices, he has asked 
the operating BOT companies (including U.S.-owned companies 
Trakya Elektrik and Doga Energi) to consider re-negotiating 
their contracts.  Gunay suggested to the companies in a 
January 13 meeting that the Ministry of Energy might be 
flexible on extending the BOT contracts, if they could be 
flexible on purchase guarantees and prices.  (Note:  As 
reported ref a, Trakya and Doga filed suit against EMRA in 
October 2002, claiming that EMRA's requirement that they 
apply for licenses is a breach of contract.  Company 
representatives will bring EMRA's latest proposal to their 
boards before responding.) 
 
 
7. (C)  Energy Minister Guler told Ambassador in a January 15 
meeting (septel) that the price of electricity the government 
was obligated to purchase from the five BOT plants in 
operation was far too expensive and he (the Minister) "needed 
to find a solution."  Guler emphasized, however, that he was 
"keenly aware" of the need to find a solution that would not 
scare foreign capital.  He said he was working to find a 
"delicate balance." 
 
 
Pending BOT/TOR Projects 
------------------------ 
 
 
8. (U) The press reported January 15 that the government had 
decided to cancel the 29 pending BOT projects.  According to 
the press, those companies with international arbitration 
clauses in their contracts will be able to apply to 
arbitration for compensation of their losses.  Ministry of 
Energy officials have not been able to confirm these press 
reports, but we are following up.  On the TOR contracts, 
Kanel (which is jointly owned by NRG-Peabody and Koc), 
applied for international arbitration at the ICC in Geneva on 
December 12, claiming development and lost profit damages due 
to the GOT,s failure to follow through with the project. 
 
 
Comment 
------- 
 
 
9. (C) While we sympathize with the government's desire to 
decrease electricity prices, targeting existing BOT operators 
likely will have a negative impact on the investor climate in 
Turkey, especially if the government's approach is 
heavy-handed.  The best way for the government to lower 
energy prices is to promote economic reform and growth (to 
balance the electricity surplus), continue on the path of 
liberalization, and improve collections.  We will continue to 
make this point to the new government, and urge that it honor 
existing contracts or reach mutually agreeable solutions with 
the companies.  Otherwise, Turkey likely will face more cases 
of international arbitration, which will be expensive and 
damaging to the foreign investment climate.  End comment. 
PEARSON