More Turkish Power Industry Reforms

More Turkish Power Industry Reforms

August 01, 2001

Turkey has taken three more important steps to reform its power industry. 

The Turkish parliament passed a new “Natural Gas Market Law.”

TEAŞ — the state-owned electricity trade, generation and transmission company — is being split into three separate joint stock companies.  Companies holding contracts with TEAŞ may face some issues.

The Turkish parliament has extended the deadline for the transfer of rights for remaining TOR projects from June 30 to October 31, 2001.  A “TOR project” is an existing power plant that is owned by the government, but that needs upgrades.  The government transfers the project’s operational rights to a private party in exchange for a transfer fee and its agreement to make the upgrades.  The private party then has the use of the facility for an extended period, after which it must transfer it back to the government.

Natural Gas

The country adopted a new “Natural Gas Market Law No. 4646” that now regulates the import, export, transmission, distribution, storage, marketing, and trade of natural gas.  The only significant gas activity not on this list is gas production.

The new law applies to the natural gas market many of the same reforms that were made in the electricity market in the “Electricity Market Law” last March.  These include identification of a regulatory body to oversee the gas market, establishment of a new licensing regime, and introduction of the concept of “eligible consumers.” The new law also attempts to encourage the development of Turkish natural gas capabilities and to discourage monopolistic behavior.

The Electricity Market Law last March established an independent regulatory authority called the Electricity Market Regulatory Authority to oversee the electricity market.  The new gas law renames this body the “Energy Market Regulatory Authority” and gives it the authority to regulate not only the electricity market but also the gas market.

Under the new gas law, companies engaged in natural gas market activities must be licensed by the regulatory authority for each “market activity” they intend to carry out. “Market activities” are the transmission, storage, wholesale sale, export, import, and urban distribution of natural gas.  If a legal entity intends to engage in more than one market activity or a single market activity at different facilities, it must obtain a separate license for each market activity or facility.  The new gas law also requires companies to have a “qualification certificate” from the regulatory authority before they may engage in design, construction, revision, repair, supervision, rehabilitation, maintenance, or control activities for anyone in the natural gas market.  The terms of these licenses and certificates generally are between 10 and 30 years.

The new gas law introduces an “eligible consumer” concept.  Eligible consumers may enter into natural gas purchase contracts directly with any production, importation, distribution, or wholesale company within the country.  In the past, such direct agreements were not permitted.  Four categories of persons qualify as “eligible consumers.” One category is consumers and user unions, such as coops or other organized industrial groups that supply natural gas to members and whose annual natural gas purchases are more than one million cubic meters.  Another category covers companies purchasing natural gas to generate electricity.  Another is for cogeneration facilities that generate both electricity and steam.  The last category is generation companies producing natural gas in Turkey for production activities.

The new gas law also contemplates the restructuring of the state-owned Pipelines and Petroleum Joint Stock Company, called “BOTAŞ.” BOTAŞ will be broken into separate transmission, storage, sale and export companies after 2009.  All of those companies, except the transmission company, will be privatized within two years from the date of formation.

To prepare for the restructuring, the new gas law takes steps to reduce BOTAŞ’s share in the natural gas market to no more than 20%.  The law establishes strict limits on the purchase and sale of natural gas by BOTAŞ.  BOTAŞ may not enter into new gas purchase agreements — most of which are import agreements — until its natural gas imports are reduced to 20% of the national consumption of natural gas.  After a transition period over the next 12 to 18 months, BOTAŞ must conduct tenders and transfer its natural gas purchase and sale contracts to other qualified import companies until it imports no more than 20% of its current natural gas consumption.

The new gas law also attempts to prevent any other single company from controlling more than 20% of the country’s natural gas requirements.  No single market player will be allowed to import or sell wholesale more than 20% in national consumption of natural gas each year.

Finally, the new gas law permits existing build-operate-transfer and build-operate natural gas-fired projects — called BOT and BO projects — to purchase natural gas from any source.  Most of the current projects have contracts to sell their power to TEAŞ, the state-owned generation and transmission company.  Such contracts are often supported by a treasury guarantee of the obligations of TEAŞ.  However, the new gas law states that if a company purchases natural gas from any source other than BOTAŞ, its sale contract to TEAŞ may lose the benefit of the treasury guarantee.

TEAŞ Restructuring

Articles of association have been issued for the three new companies that will succeed TEAŞ.  Those companies are the Turkish Electricity Trade and Undertaking Joint Stock Company, the Electricity Generation Joint Stock Company, and the Turkish Electricity Transmission Joint Stock Company.

Two of the articles of association clearly state that TEAŞ will be dissolved when the new companies are formed, which will be when their respective boards of directors are constituted.  Each of the boards of directors will consist of a general director and four other directors, all of whom will be appointed jointly by the Prime Minister and the Minister of Energy and Natural Resources.  Although there is no indication of when these appointments will occur and, therefore, when the new companies will be formed, it is generally believed that the appointments will occur in the relatively near future.

The articles of association generally require each of the new companies to assume the rights and obligations that TEAŞ has under any contracts (including internal and external credit arrangements), lawsuits and enforcement actions.  However, with one exception, they simply state that each new company will incur the rights and obligations that are associated with the activities of that new company.  Therefore, confusion and disagreements are possible over which new company assumes which rights and obligations of TEAŞ.

The articles of association of the new trade company specifically state that the energy sales agreements that were executed prior to the adoption of the Electricity Market Law will be assumed by the new trade company.  They also state that the new trade company has the authority to “amend . . . the energy sales agreements . . . in line with the changing sector conditions and legislative regulations by also obtaining the affirmative opinion of the Under-secretariat of the Treasury.” There is some concern that the new trade company will use that authority as a justification to demand that certain project companies discuss the renegotiation of their energy sales agreements.

The Turkish Electricity Distribution Company is not directly affected by this restructuring, except that it now must enter into new agreements with each of the new companies regarding the tariffs for goods and services supplied to each other.

TOR Projects Deadline

Turkey had directed earlier that the transfer of rights in all remaining TOR projects must occur by June 30, 2001.  The Turkish parliament has now extended that deadline until October 31, 2001.  However, the extension may not provide enough time for existing projects to overcome their many legal and practical hurdles.  It is still difficult for project companies to find officials to execute the necessary contracts on behalf of the government, even if they have already been negotiated and agreed.  This difficulty is largely because of the on-going “White Energy” corruption scandal and investigation.

In addition, many project companies are in danger of losing their rights to their TOR projects because of their ownership of television and radio stations.  Turkey’s radio and television law prohibits anyone with more than a 10% share in a radio or television company to participate in a tendered contract with the government.  This includes TOR contracts.  Although many of the project companies affected by this 10% limitation are fighting the restriction, it is unlikely that their legal challenges will be resolved by October 31, 2001.