By Kristin Meikle & Begum Durukan

Turkey is in the process of overhauling its electricity laws. The government submitted a bill to parliament in mid-December. The measure is expected to pass in early February.

The new rules should eventually open up opportunities for private developers. However, the reforms are not expected to be completed until 2003. In the meantime, developers may find themselves in limbo while waiting for two new regulatory bodies to come out with regulations.

Privatization

The legislation is supposed to address a number of conflicting goals of the Turkish government, including adhering to the debt ceilings prescribed by the International Monetary Fund while at the same time liberalizing the energy market to attract investment in order to address the projected rapid — by some estimates, as high as 10% — annual growth in electricity consumption.

The first set of changes is primarily organizational. As anticipated, the Turkish Electricity Generation and Transmission Corporation, or “TEAS,” will be broken up into three entities: a marketing firm, a generation company and a transmission company. The transmission company will be the successor to TEAS and will remain state controlled. Generation and distribution assets are expected to be sold in a state-run auction. The privatization is expected to get underway by 2003, but to take past 2003 to complete.

The bill allows for competition between the state-controlled marketing and generation companies and private entities. Consequently, once the draft law becomes effective, all electricity-related activities — other than transmission — will be carried out by some combination of authorized private legal entities and a state-run company that consists of remnants of the state-controlled marketing firm and generation company.

Private companies that enter this business will be subject to some restrictions.

First, foreign entities are prohibited from taking a controlling interest in any company that has a monopoly over electricity distribution in a particular region. Second, no private generator can have more than a 20% market share comparing its output in the current year to generation and consumption nationwide the year before. Finally, private companies are restricted to performing activities in one sector only. For example, a company that generates electricity will not be allowed also to distribute it. However, subject to certain limitations, a company will be able to own shares in companies that provide other types of services, provided that this is not a controlling interest.

Amendments are possible to the government’s draft bill before it passes parliament. The two most likely areas for amendment are the rules governing foreign ownership and the percentage of market share that a private generator may have.

New Regulatory Bodies

Two new regulatory bodies will be established: the Energy Market Regulatory Authority, or “EMRA,” and the Energy Market Regulatory Board. The board will be an arm of EMRA.

EMRA will be responsible for issuing regulations governing the sale, trade, import and export of electricity by private companies.

The board will license private companies to operate in Turkey and assess penalties where companies fail to comply with their obligations. The board will have seven members. They are expected to be appointed within three months after the draft law takes effect. However, the board will not start issuing licenses until 2003.

There will be a transition period of 18 months after the draft law is published in the “official gazette” before it takes effect. The council of ministers has discretion to extend this period by an additional six months. Many government officials believes the transition period in the bill is too short and that 36 months may be more realistic. During the transition period, private companies currently operating in the Turkish energy market are permitted to continue their operations without a license. However, all private companies — including owners of existing power plants — will have to apply for licenses before the end of the transition period.

EMRA will have the final say over the prices at which electricity can be sold. The method for regulating electricity prices will be established through a separate piece of legislation; the government has not yet released the draft. However, regulations on electricity pricing are expected to be in place before the end of the transition period.

Government Guarantees

The draft law will eliminate guarantees of private projects by the Turkish government. The Treasury Department currently guarantees certain payments to be made by TEAS under contracts with private companies. Any projects already completed will continue to be guaranteed. Projects under development will be guaranteed, provided that they are commissioned by the end of 2002. The undersecretariat of the State Planning Organization and the Ministry of Energy and Natural Resources released a list of 29 power projects in January that will be covered by Treasury guarantees, provided that they are commissioned by the end of 2002. Guarantees on these projects are still expected despite the government’s promise in a letter to the International Monetary Fund that projects announced after January 1, 2001 would no longer qualify for guarantees.

The lack of a Treasury guarantee will have considerable short-term impact on the appeal of the Turkish generation sector for private investors. However, once the transition period has been completed, the more liberal and competitive energy market should engender new interest in such investment.

by Kristin Meikle, in Washington, and Begum Durukan with the Birsel Law Offices, in Istanbul