Identifier
Created
Classification
Origin
03ANKARA6144
2003-10-01 08:48:00
CONFIDENTIAL
Embassy Ankara
Cable title:  

REGULATORS COMPLAIN OF STIFF OPPOSITION TO ELECTRICITY REFORM

Tags:  ECON ENRG PREL TU 
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010848Z Oct 03
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).




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