UNCERTAINTY FOR PENDING AND EXISTING BOT/TOR

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 008594

SIPDIS


STATE FOR E, EB/CBED, EB/IFD, AND EUR/SE
DEPARTMENT PASS OPIC FOR ZAHNISER AND J. WILLIAMS
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: 11/20/2012
TAGS: EINV ENRG ECON PREL TU
SUBJECT: UNCERTAINTY FOR PENDING AND EXISTING BOT/TOR
PROJECTS IN TURKEY


REF: A) ANKARA 4740 B) ANKARA 3892


Classified by DCM Robert Deutsch; reasons: 1.5 (b,d).



1. (C) Summary and comment: Embassy has long emphasized to
the GOT the importance of a rapid and fair settlement to the
pending BOT/TOR projects, which still have not been resolved
(reftels). It now appears the GOT is considering
re-negotiation of the contracts for the BOT projects that are
already in operation, including U.S.-owned companies Trakya
Elektrik (Enron) and Doga Enerji (Edison Mission). Trakya
and Doga have filed suit against the government, claiming
that recently announced regulations are in violation of their
contracts, and are intended to force the companies to lower
their prices. As we engage the new government on economic
matters, we will couple our support for their overall energy
liberalization efforts with an emphasis on the importance of
contract sanctity.


Existing BOT Projects Fear Contracts Will Be Reopened
-------------- --------------



2. (C) A year after being established, the Energy Market
Regulatory Authority (EMRA) is still grappling with how to
handle the pending build-operate-transfer (BOT) and
transfer-of-operating rights (TOR) energy projects.
Unfortunately, EMRA is also now reevaluating the six BOT
projects that are already in operation, which include the
U.S.-owned, OPIC-financed energy companies Trakya Elektrik
(Enron) and Doga Enerji (Edison Mission). (Note: Enron's
share in Trakya Elektrik is reportedly being sold by the
bankruptcy court in the U.S. on November 22).



3. (C) Trakya Elektrik and Doga Enerji filed suit against
EMRA on October 3, claiming that the electricity market
regulations released by EMRA in August constitute a breach of
their implementation contracts. The companies have requested
an injunction on implementation of those articles of the
regulations that could ultimately affect their contracts.
For example, the new regulations require all companies --
even those already in operation -- to apply for operating
licenses. The new regulation also stipulates that companies
must adhere to all existing and future changes to the
regulations, which Trakya and Doga claim opens their
contracts to unilateral modifications.



4. (C) Although EMRA President Yusuf Gunay told us the
requirement for existing operators to apply for a license is
a "formality," the BOT companies see it as a means for EMRA
to reopen negotiations on the prices in the contracts.
Various GOT officials have long claimed that the BOT prices
for electricity are too high. (Note: the BOTs are charging
in the range of 10-12 cents per kilowatt hour. In
comparison, the new Intergen BO plants charge in the range of
4-6 cents per kilowatt hour. End note.) The BOT companies
argue that their prices accurately reflect the level of risk
and higher costs they faced when they signed the contracts in
1993, and when they built the plants in the late 1990s.
However, the companies assert (correctly, in our view),
whether or not the GOT believes the prices are too high, the
fact remains that these are the prices stipulated in the
contracts signed by the GOT after years of negotiation.



5. (C) Conversations with EMRA's legal advisor and others
indicate that Trakya and Doga's suspicions that EMRA will
reopen their contracts are not unfounded. Ali Ulusoy, a
university law professor, heads an independent commission
enlisted by EMRA to provide recommendations on how to manage
the roughly 100 pending and existing BOT, BO, and TOR
projects as Turkey liberalizes its energy market. Ulusoy
emphasized to econoff that he believes the existing BOTs must
reduce their prices, claiming that "otherwise we will not be
able to move to a liberalized market." Ulusoy stated that
the BOT companies should be "willing to renegotiate" prices
in the interest of supporting a free energy market in Turkey,
which in the long-term should provide companies with more
opportunities. Responding to econoff's point that Turkey
would likely pay in terms of decreased FDI if potential
investors concluded that the GOT did not honor its contracts,
Ulusoy responded that Turkey had "no other option" if it
wanted to achieve a free energy market in the next several
years.

6. (C) The General Manager of Uni-Mar, one of the non-U.S.
BOT companies, told econoff it was clear that EMRA's
intention was to force the BOTs to cut their prices. He said
that even if there was room for some "flexibility" on the
price issue, contractually the companies were under no
obligation to renegotiate with the GOT. For this reason,
Uni-Mar joined Trakya Elektrik and Doga in their October 3
lawsuits. TETTAS General Manager Hayrettin Yildirim also
told econoff the GOT wanted the BOTs to cut their prices.


Meanwhile, No Progress on Pending BOT/TOR Projects
-------------- --------------



7. (C) As reported Ref A, there has been no progress toward
resolution of the pending BOT/TOR projects since former
Ministers Cakan and Dervis committed in May to settle all
pending signed contracts as soon as possible. As of
September 3, when the electricity market law went into force,
EMRA took over responsibility for settling these projects.
EMRA President Yusuf Gunay recently told emboffs he is still
working on a strategy for managing the pending BOT/TOR
contracts, noting that he believes EMRA should act as a
"mediator" between the signators of the contracts, i.e. the
companies and the Ministry of Energy. However, Gunay, as
well as legal advisor Ulusoy, made clear that the companies
must be flexible on the issues of price and treasury
guarantees.


Role of the New Government
--------------



8. (C) The AK party announced in its "emergency action plan"
on November 16 that it would complete the pending TOR
projects within one year. According to several GOT and
energy company officials, this policy is being driven by Afif
Demirkiran, newly-elected AK parliamentarian and former
General Manager of three of the pending TOR projects. Some
company representatives believe the election of Demirkiran
bodes well for the BOT projects as well, since it would be
difficult for the government to treat the BOT and TOR
projects differently. AK's emergency action plan also calls
for opening the energy market to competetion and cutting
electricity prices.



9. (C) Turkish Electricity Trade and Contracting Company
(TETTAS) General Manager Hayrettin Yildirim told econoff
November 20 that Minister of Energy Guler had asked senior
MENR officials for their recommendations on energy-related
issues. Yildirim, who previously headed Treasury's foreign
investment office, had recommended the new government
immediately announce its intention to honor all existing
contracts, arguing that to do otherwise would do untold
damage to Turkey's foreign investment climate. Yildirim said
his argument should resonate with the new minister, since it
was actually in the interest of TETTAS -- which purchases
electricity from the BOTs -- for the government to
renegotiate the prices of the existing BOT projects and not
to implement the pending BOT/TOR contracts. Yildirim said
the electricity from the six operational BOTs comprised about
11 percent of all of TETTAS' electricity purchases. Although
the prices may be high by 2-3 cents per kilowatt hour, he
estimated the total extra cost to the government (if it
honored the contracts) would only be about USD 200 million.
Yildirim said that was a small price to pay to avoid
companies going to international arbitration and discouraging
potential investors.


Comment
--------------



10. (C) We have long emphasized to the GOT the importance of
honoring its contracts; however, our focus has been primarily
on the pending BOT/TOR projects (reftels). It appears that
some officials are now considering re-opening the contracts
of the BOT projects that are already in operation. We agree
with AK that electricity is relatively expensive in Turkey;
however, high prices are not only a result of the BOT plants
-- the high price BOTAS pays and charges for gas, inefficient
distribution networks, and low bill collection rates also
play an important role. Although it is not yet clear how AK
intends to handle the pending or existing energy projects, we
will emphasize to the new government that, while the U.S.
supports establishment of a free energy market in Turkey, the
GOT cannot expect to attract more foreign investment unless
it honors its existing contracts, or adequately compensates
investors when it cannot do so. End comment.
PEARSON