ELECTRICITY SECTOR REFORM AND PRIVATIZATION STRATEGY PAPER

[High Planning Council – March 17, 2004]

I. OBJECTIVES AND PRINCIPLES

The primary objective is to ensure the delivery of electricity (which has a significant role in our economic and social life) to consumers in an adequate, quality, continuous and low-cost manner.

In order to reach this primary objective and the target for adoption of the relevant EU Acquis, the liberalization in the electricity sector will proceed.  Following the completion of the necessary sector reforms and the restructuring of state-owned electricity enterprises the electricity generation and distribution assets will be privatized.  Timely and successful privatization of electricity generation and distribution is an essential element of market liberalization. 

The primary benefits expected from electricity sector reform and privatization have been determined as follows: 

i.  Decreasing of costs through effective and efficient operation of electricity generation and distribution assets;

ii.  Increasing the supply quality and supply security in the electricity sector;

iii. Decreasing the technical losses in distribution sub-sector to the level in OECD countries and prevention of theft (non-technical losses);

iv.  Ensuring that the required rehabilitation and expansion investments are performed by the private sector without creating any liabilities on the public institutions; and

v.  Transferring to consumers the benefits obtained through competition in generation, trade of electricity, and regulation of quality of service.

As part of this program, the steps required for creating confidence in local and international investors shall be taken immediately, 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. 

II. BASIC PRINCIPLES OF PRIVATIZATION 

The principles by which privatization will be undertaken include:       

i.   The privatization activities will be performed by the Privatization Administration within the framework of the provisions of Law no. 4046.

ii.   The privatization approach will not be solely aimed at the maximization of privatization income.

iii.  There will be utmost efforts to ensure that the privatization does not lead to permanent increases in electricity prices.

iv.  The participation of financially strong companies able to achieve the objectives and principles of the program will be encouraged in the privatization process.

v.  The mandatory investments and mandatory operational and maintenance activities will be performed independently from the privatization process.

vi.  The related legislation will be modified, if required by the Privatization Administration in order to accelerate and facilitate the privatization of generation and distribution assets as indicated in this strategy paper.

vii.  Since the distribution companies, holding retail licenses and operating in a liberal market, have to create confidence on investors engaged or to be engaged in generation activities, privatization will start in the distribution sub-sector.

viii. A competitive generation structure will be achieved through appropriately grouping generation assets prior to their privatization. 

ix.  The privatization approach will take into account existing public liabilities and will not lead to additional State guarantees.

III. PRIVATIZATION – PREPARATORY ACTIVITIES

Before the commencement of tender process for distribution privatization:

1) The distribution companies’ tariffs for wire operation and retail will be set  through finalization of

a) Transition contracts between the distribution companies and the generation groups, or

b) Transition contracts between the distribution companies and TETAS, and

c)  Transition contracts between the EUAS hydro generation and TETAS.

2) In order not to prevent the development of wholesale market, the transitional balancing and settlement mechanism for the wholesale market will be operational.

The privatization of the generation assets will start after the Market Management System, to be established by TEIAS, is in effect and after distribution privatization is substantially completed, which is expected to be by mid-2006.  This will ensure that efficient trading arrangements are in place to enable privatized generators to  sell their output.

The work schedule regarding the privatization in the electricity sector is presented in Annex 1. Each action indicated in this work plan will be detailed by the responsible institution(s).

IV.  PRIVATIZATION OF DISTRIBUTION REGIONS 

Number of Distribution Regions 

With due regard to the operational problems as a result of the geographical structure, the size of the region as compared to energy purchased and technical/ financial characteristics, the “existing contracts”, and the current legal process in Turkey, the number of distribution regions have been determined at most 21 throughout the country.

These regions and the provinces covered by these regions are presented in Annex 2. 

Privatization Method 

The following principles shall form the basis for privatization activities: 

i.   The license terms shall be maximum 49 years.

ii.  There will be multi-year tariff implementation periods and the first implementation period will be 5 years.

iii. The tariffs applicable in the first implementation period and the other issues regarding service quality targets shall be determined before privatization. 

iv. Distribution companies shall have supply contracts with suppliers for at least the equivalent of 85% of their forecasted load demand of non-eligible consumers in their regions.

v.  The tender documents will include the following minimum conditions regarding the revenue requirement for the first tariff implementation period and approved tariffs, and the bids will be evaluated on the basis of the prices proposed: 

• Specific quality of service obligations with targets and penalties;

• A pre-defined loss reduction profile;

• Specific rehabilitation investments required;

• A methodology for subsequent tariff reviews.  

vi.  Only distribution companies will be allowed to sell to non-eligible consumers. 

vii. The eligible consumer limit will be fixed at 7.8 GW-hour until the beginning of 2009. Within the framework of schedule to be determined, the eligible consumer limit be decreased starting at the beginning of 2009 in line with the objective of opening the whole market to competition by 2011. During such period, due consideration will be given to security of supply.  

Action Plan for Distribution Privatization                                                                 

-   TEDAS and its Related Partnerships will be taken to the privatization program till April 1, 2004.

-   Until 30 April 2004;

• The legal arrangements regarding the formation of the distribution regions will be completed.

• The PA will sign consulting services contract (transaction advisor) for privatization transactions. 

-   Until 30 September 2004;

• The performance standards and loss targets will be identified for each distribution region. 

• The accounting separation of the distribution regions will be completed. 

-   Until 31 October 2004;

• The load profiles for the distribution regions will be prepared.

• The charging methodology for the tariffs to be implemented in the distribution regions will be prepared and the cost of service analysis will be completed.  

• The tariff equalization scheme will be designed.

-   Until 30 November 2004;

• The revenue requirement of the distribution regions will be determined. 

• The distribution companies in the privatization program will file license applications for the distribution regions identified. 

• The transition contracts between TETAS and distribution companies or between Portfolio generation companies/groups and distribution companies will be signed. 

-   Until 31 December 2004;

• The distribution companies will file their tariff applications. 

• Separate licenses will be granted for each distribution region and tariff proposals submitted for each distribution company/region in line with the pre-determined revenue requirement shall be approved by EMRA to be effective as of 1 January 2005. 

-   Until 31 March 2005;

• The tender process for distribution companies/ regions will initiate after the completion of the above indicated preparatory activities and the main target will be to privatize all distribution companies/ regions until 31 December 2006. 

• If deemed necessary during the implementation process, the transitional contracts shall be revised and the tariffs shall be revised by EMRA.

V. RESTRUCTURING AND PRIVATIZATION OF GENERATION ASSETS THROUGH GROUPING 

Hydroelectric Power Plants 

The energy generation parts (sections) of all hydroelectric power plants constructed, commissioned or to be commissioned by DSI and the inseparable immovables of these will be transferred to EUAS until May 2004 on the basis of their actual costs without paying any charges to DSI. 

Definition of Portfolio Generation Groups 

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. 

Action Plan for Generation Privatization 

-      Until 30 April 2004;

• The hydro plants to be retained in public sector (i.e. EUAS) shall identified.

• The generation portion of all publicly owned hydro plants shall be transferred to EUAS.

-      Until 30 September 2004, portfolio generation groups will be identified and restructured as companies. 

-      Until 30 November 2004;

• The transition contracts between EUAS and TETAS will be signed.

• The transition contracts between portfolio generation companies/ groups and distribution companies will be signed.

-      Until 30 September 2005;

• The portfolio generation companies/ groups will be transferred to privatization scope. 

• The PA will sign consulting services contract (transaction advisor) for privatization transactions.  

-     By 1 July 2006, provided that the Provided Market Management System, to be prepared by TEİAS, is operational, the privatization process will commence for portfolio generation companies/ groups.

VI. MARKET IMPLEMENTATION 

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 transition contracts will initially cover about 85% of the total demand of non-eligible consumers in the related distribution region. These transition 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. 

Strengthening of TEIAS 

In order to ensure that TEIAS performs its responsibilities arising from Electricity Market Law no. 4628 and related legislation and its system/ market operator roles in a sound manner, TEIAS’ human resources and technical infrastructure will be strengthened. 

VII. TRANSITION PERIOD PRACTICES

Market Practices

-     By January 2005;

• The transitional balancing and settlement scheme  with 3-price periods will be initiated.

-      By July 2006;

• The complete Market Management System will become operational with hourly prices.

Tariffs

An equalization mechanism will be established to allow the balancing of the tariffs between  the distribution regions.  This equalization mechanism will be implemented to align the principle of achieving cost reflective regional tariffs for the distribution companies, with the objective of ensuring uniform national tariffs for non-eligible consumers.  The transitional tariff equalization scheme will be operational for at least the first tariff implementation period.

Transition Period Contracts

A. TETAS Purchases from Hydro and Existing Contracts

The generation of the hydro power plants that are not included within the generation groups and are 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.

B. TETAS Sales Contracts with Distribution Companies  

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.

C. Sales Contracts between Portfolio Generation Companies/ Groups and Distribution Companies 

These contracts should be put in place before distribution companies are privatized to give the generation companies/ 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.  

   Legislative Activities  

On the condition to reach to the objectives indicated in this Strategy Paper, the Electricity Market Law no. 4628 and related legislation will be modified as required. The secondary legislation, which were indicated in Law no. 4628 and are not still completed / issued, will be issued by the end of 2004.

VIII. DEMAND PROJECTION AND SECURITY OF SUPPLY  

Demand Projection

By 30 April 2004, MENR, Undersecretariat of Treasury, Undersecretariat of State Planning Organization and EMRA will complete their activities aiming to re-determine the demand projections forming the basis of the Generation Capacity Projection in a reliable manner.

Security of Supply 

The following activities will be performed to increase the supply capacity and strengthen risk management:

1.  The 2005 budget will include adequate allocation for performance of the investments, that are deemed to be very urgent, among rehabilitation and replacement investments determined by the commission for EUAS and its Affiliates or generation groups,

2.  The frequency control system investments required at publicly owned generation facilities for operation of the Turkish national electricity system in line with UCTE conditions shall be determined by MENR and Undersecretariat of State Planning Organization until 1 May 2004. MENR, Undersecretariat of State Planning Organization and Undersecretariat of Treasury will take required measures to meet the required financing.

3.  In line with the policies regarding interconnections other than UCTE, the MENR will finalize its studies regarding the development of electricity trade over interconnections by the end of 2004.

4.  The preparatory activities of TEIAS regarding capacity leasing tender within the scope of Ancillary Services Agreements required for protection of system security will be completed by TEIAS.

5.  The investment required for enhancement of the transmission system will be determined by MENR and  Undersecretariat of State Planning Organization, and in its 2005 budget, TEIAS will be granted the adequate allocation required for performance of such investments.

6.  In order to ensure fuel and resource diversity and prior planning of supply resources, MENR and Undersecretariat of State Planning Organization will carry out the new arrangements required for generation investments using domestic resources, including large scale hydro power plants.

7.  EMRA will periodically monitor and report to MENR the status of the investments by the generation licensees in their licensed generation facilities.

- Annex 1. >>

- Annex 2. >>