REGULATORS COMPLAIN OF STIFF OPPOSITION TO ELECTRICITY REFORM

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 006144



SIPDIS





STATE FOR E, EB/CBA,EB/IFD, AND EUR/SE

USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO

TREASURY FOR OASIA - MILLS AND LEICHTER

NSC FOR BRYZA

DEPARTMENT PASS OPIC

USDOE FOR CHARLES WASHINGTON





E.O. 12958: DECL: 10/01/2013

TAGS: ECON, ENRG, PREL, TU

SUBJECT: REGULATORS COMPLAIN OF STIFF OPPOSITION TO

ELECTRICITY REFORM





REF: A. (A) ANKARA 5811

B. (B) ANKARA 5646





(U) Classified by Econcouns Scot Marciel for reasons 1.5

(b,d).









1. (C) Summary. Energy Market Regulatory Authority (EMRA)

officials say Turkey's electricity reform program has stalled

because the Prime Ministry, Energy Ministry, and Turkish

Treasury have rejected EMRA's proposal to implement

cost-based electricity tariffs, which are central to the

electricity market reform effort. EMRA officials maintain

that this objection is based mainly on the Justice and

Development Party's (AK) penchant for populism ahead of next

year's local elections and the appointment of inept

bureaucrats at key energy post. Relations between the

regulator and the government are tense, and EMRA officials

fear the GOT could try to undermine EMRA's independence if it

implements the regional tariff system without full government

approval. EMRA's strategy is to appeal to NGOs, the EU, and

Washington to press Ankara for full implementation on energy

reforms, the lack of which could have ramifications for

privatization, World Bank funding, EU relations, and Turkey's

energy supply security. End Summary.





2. (C) In a September 26 meeting with Econoff, EMRA's

Electricity Market Regulation, Monitoring, and Assessment

Department Heads Murat Erenel and Seckin Ulgen and Technical

Expert Defne Gencer all expressed frustration with the

governments' resistance to introducing a market-based

electricity pricing structure that would bring the energy

sector in line with the EU acquis by 2004. Under the

proposed regional tariff system, 78 percent of industrial

users would face lower electricity costs, but households in

underdeveloped areas would suffer. Turkish Treasury and the

Energy Ministry are required to prepare a support scheme to

ease the transition for consumers in poor rural areas;

however, EMRA told us that both have refused to cooperate.





3. (C) Prime Minister Erdogan's public statement in

Diyarbakir that there would be no regional tariff system and

that higher electricity tariffs would never be brought back

to the Council of Ministers' agenda were deemed to be

particularly unhelpful, although his comments presumably

played well with the AK's grassroots ahead of local

elections, currently scheduled for April, 2004. EMRA

officials bluntly stated that the AK Party had made promises

before it took office and is eager to implement populist

policies rather than risk losing votes by introducing higher

tariffs in underdeveloped regions. They also noted the lack

of understanding of the energy reform process among newly

appointed bureaucrats as another reason for the disconnect,

and lamented the loss of institutional memory at key energy

posts at the State Electricity Transmission Company (TEIAS),

the Electricity Generation Company (EUAS),the Turkish

Electricity Contracting Company (TETAS),and the Ministry of

Energy.





4. (C) In accordance with Article 17 of Electricity Market

Tariffs Regulation, the deadline for submission of the tariff

schedule to EMRA for Board approval is the end of October

every year; approved tariffs would then be effective January

to December of the following year. Thus, if the October

deadline is missed, the entire evaluation and approval

process would have to be delayed until the 2005 budget cycle,

and the transition to establishing a cost-based pricing

system would be further postponed.





5. (C) Despite the setback, EMRA officials have strong

incentives to eventually move forward with the tariff

regulation schedule to foster energy sector privatization in

accordance with the economic reform program, to bring the

energy sector in line with EU standards, to safeguard World

Bank funding, and to ensure Turkey's longer-term energy

security. They argue that companies interested in purchasing

electricity generation rights or distribution companies

require guarantees that there will be a market-oriented

structure with cost-based pricing to secure financing and

ensure fair market returns. The distribution rights to the

Kayseri region were sold this year, but the other 32

distribution grids are still in the hands of the

Privatization Authority. Although the EU has given Ankara

credit for issuing the necessary legislation for energy

reform, without a free market structure Turkey probably will

not be able to raise the level of eligible customers

(consumers who have the right to pick the supplier of

electricity) from the current 9 million KW/h to meet the EU's

2007 target for giving all households the freedom to choose

suppliers. Ankara also could have compliance problems with

South East Europe Energy Market agreements.





6. (C) Privatization of energy distribution sytems and the

introduction of cost-based pricing for electricity are

preconditions for the disbursement of the remaining $375

million of the World Bank's $759.6 million May 2002 Economic

Reform Loan. World Bank officials currently visiting Turkey

say that the loan probably will be delayed. EMRA expects

Turkey to have an energy surplus until the fourth quarter of

2007 and first quarter of 2008. Demand growth, however, is

expected to surpass generation in 2008, and the surplus could

become a deficit if new investments are not undertaken by

2004 to allow sufficient time for construction and licensing.

EMRA officials stressed that both investors and creditors

want to see the free market functioning before supporting any

investments in Turkey.





7. (C) Relations between EMRA and the government remain

tense, given the high stakes surrounding the tariff issue,

and the regulator has been subject to harsh criticism,

especially from the Energy Ministry and the Prime Minister.

EMRA has the legal authority to implement the regional tariff

system, but fears the government could try to undermine its

independence if it moves forward without full approval. EMRA

officials claim the pending Petroleum Market Law poses a

threat to its existence as well. The Council Of Ministers

recently discussed establishing a separate board for

petroleum, but most ministers supported the idea of adding

petroleum to EMRA's portfolio. From EMRA's perspective, this

gives the government an opportunity to appoint new

anti-reformist members to the Board and to change EMRA's

mission over time.





8. (C) EMRA's handling of the BOT companies (Reftels A, B)

also has strained relations with the Energy Ministry. EMRA's

extension of the deadline for BOT companies to apply for

operating licences drew sharp criticism. EMRA officials

believe that these companies will be part of the functioning

electricity market over time and will voluntarily give up

doing business with the government as the single buyer. EMRA

claims that the Energy Ministry wants to use licences as

leverage to secure a reduction of electricity prices from the

companies.





9. (C) EMRA officials reminded econoff that energy market

reform also is part of Turkey's economic reform program,

while noting that the government must be held accountable for

sectoral reforms. EMRA appealed to the Embassy to raise the

slow pace of electricity market reform with Foreign Minister

Gul and Finance Minister Unakitan, both deemed to be

influential members of the Council of Ministers, who could

push these reforms back on the government's agenda. EMRA also

plans to contact NGOs and the EU to press Ankara for the full

implementation of energy reforms.





10. (C) Comment: EMRA officials have been expressing

frustration to us for months over problems with the

government, which continues to see electricity prices through

a political prism. Just recently, Prime Minister Erdogan

bragged that the government had avoided raising electricity

costs (despite a need),and government ministers continue to

talk about possible electricity subsidies to industry. End

Comment.

EDELMAN