PRIVATISATION OF THE ELECTRICITY DISTRIBUTION BUSINESS AND ITS IMPORTANCE FOR TURKEY
Fevzi Saffet Bora
Journal of Turkish Weekly, Turkey
2006-09-12 16:57:54
Turkey has a geopolitical location on the intersection point of Asia,
Europe and Africa. Turkey is linked to the oceans through the Black,
Marmara and Mediterranean seas. It has been the center of trade
and migration routes throughout time. The Black Sea is linked to the
world via the Bosporus and Dardaneles Straits and shipping routes pass
through the Marmara Sea to reach the Mediterranean. Georgia, Armenia,
Azerbaijan and Iran on the east, Bulgaria and Greece on the west,
and Iraq and Syria on the south are Turkey’s neighbors.
Turkey is a member of international organizations such as the UN,
the Council of Europe, NATO, OECD, the Organization for Security and
Cooperation in Europe, WTO, the Organization of Islamic Conference
(OIC), the Black Sea Economic Cooperation Organization, the Economic
Cooperation Organization (ECO). Turkey is now a candidate for full EU
membership and considered as one of the nine most important countries
which the British Government wants to establish and increase commercial
relations with.
Turkey since 1983, has been trying to undertake serious macro economic
structural reform together with its transition to deeper democracy. In
this respect, the energy sector constitutes one of the most important
areas in which structural reform takes place and serious foreign
direct investment is expected in order to inject permanent cash into
the economic system.
In this respect market liberalization activities have taken bold steps
in the last five years. As a part and complementary to these steps
privatization is viewed as the turning point in the sustainability
of the new regime in energy.
The Privatization of the electricity distribution business in Turkey is
the hot issue in the agenda right now. 20 new distribution companies
have been established from within the body of TEDAS (the Turkish
Electricity Distribution Company owned by the state) as it had been
restructured in 2004. based on geographical proximity, managerial
structure, energy demand and other technical/financial factors.
These joint-stock companies engaged in the distribution and retail
sale of electricity and provision of retail services to final customers
has approximately 28 million customers, 93 billion kWh of electricity
sales and 98% market share in electricity distribution across Turkey
according to very recent figures.
A total of 21 distribution companies are now active in electricity
distribution operations with the Kayseri and Its Surroundings
Electricity Distribution Company (already private). TEDAS is also
legally present as a holder of the network entities as well.
There are some principles which were declared to be adhered to, during
the process of the privatization of the electricity distribution
business, which were agreed upon by the relevant authorities to make
this aim worthwhile for Turkey. These are:
– The privatization will be performed by the Privatization
Administration within the framework of Law no. 4046, – Income
maximization will not be the sole aim.
– Increases in electricity prices after privatization will not be on
a permanent basis.
– Strong companies to achieve the principles of the program will be
encouraged in the privatization process, The mandatory investments
and maintenance activities will be performed independently from the
privatization process, A competitive generation structure will be
established through appropriately grouping generation assets prior to
their privatization. Seventeen hydropower plants, which total 7.055
MW of capacity will remain in government ownership, The privatization
approach will take into account existing public liabilities and will
not lead to additional state guarantees, The transmission system
and market operator, TEIAS, will remain in state ownership, Only
distribution companies are allowed to supply non-eligible consumers.
Before the starting of the tender process for distribution
privatization, there were some issues to be tackled with;
The distribution companies’ tariffs for the wire and retail businesses
were to be set through the finalization of transition contracts
between the distribution companies and the generation groups, or
transition contracts between the distribution companies and TETAS
(Electricity Wholesale Company owned by the state), and transition
contracts between the EUAS (Electricity Generation Company owned by
the state) hydro generation and TETAS.
The generation of the hydro power plants which will remain to be state
owned and under the possession of EUAS shall continue to be sold to
TETAS as long as it is deemed necessary to achieve an average TETAS
sales price that reflects the expected market price. TETAS¸ can buy
electricity at a low price from these plants to compensate for the
additional burden caused by electricity purchases at prices exceeding
the market price from the BOO (Build, Operate, Own) and BOT (Build,
Operate, transfer) schemes.
The energy purchased by TETAS through existing contracts and EUAS
generation, will be allocated among the Distribution Companies through
purchase agreements to be signed between TETAS and distribution
companies.
In case TETAS is unable to recover adequate revenues to cover its
liabilities arising from long term contracts, these excess liabilities
will be recovered through a surcharge to be added on the transmission
use of system charges.
Sales Contracts between Portfolio Generation Companies and Distribution
Companies should be put in place before distribution companies are
privatized to give the generation company groups a track record
prior to their privatization. The contracts should continue after
the privatization to assure a predictable stream of revenues in
the early years. The transitional contracts in the last two groups
will initially cover about 85% of total demand of captive consumers
in each distribution region. The rest 15% should be supplied from
private sources and the distributions companies have no more a limit
on the amount of their own generation which will be an incentive for
the investors.
The transitional balancing and settlement mechanism for the wholesale
market is forecasted to be operational in order not to prevent the
development of wholesale market.
The following corporations have been established prior to privatization
within the context of the High Planning Council Decision dated
17.03.2004 and Decree No:2004/3.
CORPORATIONS PROVINCES Akdeniz Elektrik A.Þ. Antalya, Burdur, Isparta
Ýl sýnýrlarý Aras Elektrik A.Þ. Erzurum, Aðrý, Ardahan, Bayburt,
Erzincan, Iðdýr,Kars Coruh Elektrik Daðýtým A.Þ. Trabzon, Artvin,
Giresun, Gumuþhane, Rize Dicle Elektrik Daðýtým A.Þ. Diyarbakýr,
Þanlýurfa, Mardin, Batman, Siirt Þýrnak Fýrat Elektrik Daðýtým
A.Þ. Elazýð, Bingol, Malatya, Tunceli Gediz Elektrik Daðýtým
A.Þ. Ýzmir, Manisa Goksu Elektrik Daðýtým A.Þ. Kahramanmaraþ,
Adýyaman Camlýbel Elektrik Daðýtým A.Þ. Sivas, Tokat, Yozgat Menderes
Elektrik Daðýtým A.Þ Aydýn, Denizli, Muðla Osmangazi Elektrik Daðýtým
A.Þ. Eskiþehir, Afyon, Bilecik, Kutahya, Uþak Toroslar Elektrik Daðýtým
A.Þ. Adana, Gaziantep, Hatay, Mersin, Osmaniye, Kilis Uludað Elektrik
Daðýtým A.Þ. Balýkesir, Bursa, Canakkale, Yalova Van golu Elektrik
Daðýtým A.Þ Bitlis, Hakkari, Muþ, Van Yeþilýrmak Elektrik Daðýtým
A.Þ. Samsun, Amasya, Corum, Ordu, Sinop Baþkent Elektrik Daðýtým A.Þ.
Ankara,Kýrýkkale,Zonguldak,Ba rtýn, Karabuk,Cankýrý, Kastamonu.
Boðazici Elektrik Daðýtým A.Þ Ýstanbul ili Rumeli Yakasý.
Ýstanbul Anadolu Yakasý Elektrik Daðýtým A.Þ. Ýstanbul ili Anadolu
Yakasý.
Meram Elektrik Daðýtým A.Þ. Kýrþehir, Nevþehir, Niðde, Aksaray,
Konya,Karaman.
Sakarya Elektrik Daðýtým A.Þ. Sakarya, Bolu, Duzce, Kocaeli.
Trakya Elektrik Daðýtým A.Þ. Edirne, Kýrklareli, Tekirdað.
The above mentioned companies and their tariff structures and licenses
have been approved very recently by the Energy Market Regulatory Board,
the transitional balancing and settlement mechanism for the wholesale
market and also the market management system of TEIAÞ are said to be
in place which finally provided them the possibility for readiness
for privatization by the Privatization Administration (oib.gov.tr).
The Privatization Administration has started the privatization process
with the simultaneous tender of 3 companies
a. Baskent Elektrik Dagitim A.S. ("BASKENT" Region 9) b. Istanbul
Anadolu Yakasi Elektrik Dagitim A.S.
("AYEDAS" Region 14) c. Sakarya Elektrik Dagitim A.S. ("SEDAS"
Region 15)
Privatization of distribution companies is planned to be executed
using a Transfer of Operating Rights ("TOR") backed Share Sale
model ("TSS model"). In this model, the investor will be the owner
of the shares of the company who will hold the licensee for the
distribution of electricity in the relevant region but it will not
hold the ownership of the network assets in the same region. They will
remain with TEDAS. The investor will be granted the right to operate
the distribution assets stemming from a Transfer of Operating Rights
Agreement ("TOR Agreement") with TEDAS. Under this market structure,
privatized electricity distribution companies will act as regional
monopolies with distribution licenses to be obtained from Energy
Market Regulatory Authority (EMRA).
The main purpose of this system is to achieve lower tariffs by
increasing overall system efficiency. In this respect, the tariffs
are calculated on a "cost-reflective" basis with predetermined
operating and loss/theft betterment objectives. The first tariff
implementation period (or transition period), set between 2006 and
2010, will serve as a transitory period to a fully cost based tariff
structure after 2010. EMRA recently approved the end user tariffs and
revenue requirements of each distribution company for the transition
period. Revenue requirements cover the forseen expenses for providing
distribution and retail services and leave room for financial gains
for the target level of technical and non-technical losses.
The end-user tariffs for the period after 2010 will be determined by
the distribution companies in accordance with the Electricity Market
Tariffs Communique and the related regulations and will be subject
to EMRA’s approval. The first period is aimed at having a smooth and
gradual transition from existing tariff structure to a lean and simple
tariff structure. The tariff structure is determined in compliance with
the Electricity Market Law, the Electricity Market Tariffs Communique
and other related regulations. The four basic tariff components are
(1) retail sales, (2) distribution, (3) retail services and (4)
transmission; which are regulated in an unbundled fashion. Retail
sales tariff has a "price cap" which is set as the average price
of the energy purchased by the distribution company. Distribution
and retail services have "revenue caps" which cover operating
expenses and investment requirements related to distribution and
retail services. Transmission tariff is a complete pass-through of
transmission costs as charged by TEÝAÞ.
When we decompose the end-user tariffs, we come across with the
following items in the basket:
Customers:
~U Residential ~U Commercial ~U Industrial ~U Agricultural irrigation
~U Street lightening
Retail Tariffs:
Reference Price (Energy price ) Operating margin Lost/theft component
Distribution System Usage Tariff:
Taxes and other deductions Transmission tariff Retail services tariff
Distribution OPEX component Investments, amortization and cost of
capital component TOR value component Dual-term tariffs: capacity
charge, penalty for overload and reactive energy fee
Distribution Company
Pass-through of energy costs (TETAÞ) Pass-through of transmission costs
(TEÝAÞ)
: Total end-user electricity tariff
The consumer price of electricity is subject to some levies: (1) 1%
for the Energy Fund Share; (2) 2% for Turkish Radio and Television
Corporation surcharge; (3) the aggregated amount of the two preceding
levies is then subject to the Municipality Consumption Tax (5% for
households and 1% for industrial users); and (4) 18% VAT.
Tariffs for captive customers and for wholesale by TETAS are
regulated. Under the Electricity Market Tariffs Regulation and the
related communiques, tariffs must be cost-reflective; costs not
directly related with market operations should be left out of the
equation. Direct refunds may be granted to consumers in need without
compromising the overall cost-based principle of the tariff structure
in accordance with the Electricity Market law. Once determined by
companies, regulated tariffs are subject to review and approval by
the EMRA. All tariffs are published in the Official Gazette and on
the regulator’s website to ensure transparency.
The primary benefits expected from electricity sector reform
and privatization have been determined as follows: Decreasing
of costs through effective and efficient operation of electricity
generation and distribution assets, Increasing the supply quality and
supply security in the electricity sector, Decreasing the technical
losses in distribution sub-sector to the level in OECD countries and
prevention of theft (non-technical losses), Ensuring that the required
rehabilitation and expansion investments are performed by the private
sector without creating any liabilities on the public institutions, and
Transferring to consumers the benefits obtained through competition in
generation, trade of electricity, and regulation of quality of service.
Steps that are required for creating confidence in local and
international investors shall be taken immediately by the government,
while efforts will be made to minimize the cost of transition to
liberal market model on the public institutions currently operating
in the market.
In order to ensure that there are no supply constraints during
the transition period, temporary measures shall be taken to obtain
adequate additional capacity. Such measures will be complemented with
other programs, such as imports and rehabilitation of existing plants.
The main principle will be the implementation of cost reflective
prices in the regulated electricity sectors, whereas the national
tariff practice will be operational for the first tariff implementation
period through establishment of a tariff equalization mechanism that
will prevent price differences for non-eligible consumer tariffs.
In addition to the distribution business, generation assets
that belonged to the state are going to be restructured and
privatized through grouping. In this respect the energy generation
parts (sections) of all hydroelectric power plants constructed,
commissioned or to be commissioned by State Hydraulic Works (DSI)
and the inseparable immovables of these will be transferred to EUAS
on the basis of their actual costs without paying any charges to DSI.
The generation facilities to be privatized will be identified
and grouped on the basis of two main criteria: (i) prevention of
creating market power; and (ii) financial viability. The liberal
market structure to be implemented in Turkey is based on bilateral
contracting between buyers and sellers, together with a balancing and
settlement regime. To achieve the objectives and principles of this
strategy it is essential that the balancing and settlement regime
acts as a market where uncontracted generation can be bought and
sold. This will enhance security of supply because it facilitates
participation of independent and relatively small generators.
The priorly transitionary contracts will be set at regulated
prices and will last for a maximum of 5 years, except for TETAS
contracts. As they run out such contracts will be replaced by market
priced bilateral contracts and thus, will ensure a smooth transition
to liberal market. The balancing and settlement mechanism will be
in compliance with the objective of creating a spot market and will
include price signals to attract new investments.
In accordance with the introductory themes of liberalization,
privatization and FDI; the Government of Turkey enacted a ‘Decree
on Improving the Investment Environment in Turkey" on December 11,
2001 as a part of a national strategy to increase the overall level
of income and productivity and to raise the level of competitiveness
of firms operating in Turkey.
The mentioned decree established a coordinating body called as the
‘Coordination Council for the Improvement of the Investment Environment
(CCIIE)", with the mandate to identify and remove regulatory and
administrative barriers to private investment. This is a good step in
the right direction to attract new FDI into the country rather than
hot injections of foreign currency that do more instabilization in
the Turkish economy than good as it is mainly used for arbitrage and
stock market manipulations. FDI comes into the country for good and
for more employment and better quality of life and services.
The entrance of FDI to Turkey is the most strategic of assets to
act as a powerful card for Turkey’s international relations. There
are talks of In this age of complex interdependence, the more new
and fresh FDI enter into Turkey, there will be more actors to help
Turkey defend its positions in international platforms and in the
face of international conflicts.
The privatization of the electricity distribution business is an
opportunity worth 10 to 15 Billion Dollars that must be performed
with due respect and attention to detail.
–Boundary_(ID_d4WyAVLYzzxHRg3BUSe/7w)–