TURKEY'S ELECTRICITY EXPORTS TO IRAQ - REGULATORY

UNCLAS SECTION 01 OF 03 ANKARA 004288

SIPDIS

SENSITIVE

USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO
DOE FOR CHUCK WASHINGTON
TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER

E.O. 12958: N/A
TAGS: ENRG EPET ETRD IZ TU
SUBJECT: TURKEY'S ELECTRICITY EXPORTS TO IRAQ - REGULATORY
CHALLENGES

REF: A. ANKARA 3528

B. ANKARA 3263

C. ANKARA 1003

D. 04 ANKARA 6195

SENSITIVE BUT UNCLASSIFIED


1. (SBU) SUMMARY: The U.S., Turkish, and Iraqi Governments
share the goal of increasing exports from Turkey to Iraq.
Turkey's Kartet Company currently exports 200 MW and seeks to
increase in two steps: 1) to 350 MW, generally using existing
capacity, and 2) to 1200 MW, asserting that it has the sole
contract with the ITG MOE to put this in place with new
investment. Embassy has played a facilitating role in
assisting Kartet to overcome numerous obstacles. At the same
time, we need to be sensitive to energy regulator EMRA's
independence as Turkey aims to liberalize and improve its
investment environment, in line with its economic reform
program. EMRA is willing to license Kartet's first proposed
increase, but argues for a competitive tender for allocation
of Turkey's transmission capacity for the larger proposed
increase. Such a tender would ensure a level playing field
among companies given the interest of a number of reputable
Turkish firms. Kartet may not be the sole solution to the
Iraq electricity challenge. End Summary.

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Let's Make the Deal Happen
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2. (SBU) From the original idea in 2003 to date, the GOT
MENR (Ministry of Energy) has strongly supported Kartet
Company's (Karadeniz Toptan Elektrik Ticaret A.S.) project to
export electricity to Northern Iraq (Reftels). The need to
increase exports from the current 200 MW has been reaffirmed
by the Turkish and Iraqi Governments. An MFA contact told
EnergyOff that the MFA has strongly supported the increase
for strategic reasons. Embassy has closely followed the
issue, particularly since there was a temporary stoppage last
October (Ref D),because the contractual heavy fuel oil (in
partial payment) from Iraq had never been delivered from Iraq
(due to security and financial problems). Kartet has
scrambled to acquire (more expensive) fuel oil from Turkish
refineries and electricity from the Turkish grid. Embassy
has heard claims in the press and in the industry, that
Kartet may have engaged in a "special deal" with MENR. The
Energy Regulatory Authority (EMRA),itself engaged in a
bureaucratic turf battle with the GOT to maintain its
independence, has claimed that Kartet had illegally acquired
electricity from the grid. In March 2005, GOT and EMRA
passed legislation and implemented regulation meant to
clarify and facilitate exports of electricity.


3. (SBU) Kartet's Orhan Karadeniz told EnergyOff on July 19
that in his view EMRA was the biggest obstacle to increasing
exports. He said that for the first time Kartet had been
able to acquire some some fuel oil in Iraq (6,000 tons,
versus the contractual 30,000 tons/month). Karadeniz was
also optimistic that the issue of a bank guarantee for the
first year of the take or pay contract from Iraq would be
solvable (Kartet's condition for putting in place incremental
investment for the larger deal, potentially including the
Iraq portion). He thanked Embassy for facilitating contact
with U.S. OPIC and EXIM; he was optimistic about OPIC, but
noted that EXIM only provided 180-day credit for Iraq.
Acquisition of fuel oil in Iraq (related to security and
administrative issues within Iraq),keeping the ITG MOE
focused on implementing the contract, and financing of
investment in Iraq remain obtacles to increasing exports. In
a conversation July 26 with econ specialist, Karadeniz
reported that the Iraqis had started repair and maintenance
on their side of the border, improving the prospects for more
transmission. Both Karadeniz and other industry observers
are skeptical about electricity from Iran or from Russia (via
Georgia) given technical and EU directive constraints (Turkey
is close to joining the European synchronized UCTE grid),but
he thought these schemes could be distractions. President
Putin reportedly raised the idea of Russian electricity
exports to Iraq via Turkey in his recent meeting with PM
Erdogan. Karadeniz reminded EnergyOff that Kartet's proposal
for the smaller increase included transmitting some
electricity from Turkey to Iraq via Syria.

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We Can't Play Favorites
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4. (SBU) EMRA Electricity Market Head Murat Erenel
confirmed to EnergyOff on July 21 that EMRA was facing
pressure from the GOT to move forward on renewing Kartet's
license for electricity export to Iraq. Erenel explained
that the EMRA Board had indeed made a favorable preliminary
ruling on renewing Kartet's license in an increased amount to
350 MW, despite Sabanci and other Turkish firms expressing an
interest (Ref B). In implementing the license, EMRA had
received a positive, but slightly ambiguous opinion on
transmission capacity availability from the Turkish
transmission company (TEIAS). He said that EMRA's final
board approval on implementing the license awaited a legal
opinion on Kartet's contract with the ITG. Meanwhile, press
reported July 26--and Karadeniz confirmed--that Kartet sued
EMRA in June because of the slowness of the regulatory
approval, a fact that neither side had mentioned to energyoff
only last week. But Karadeniz said he is still talking with
EMRA and is hopeful it will authorize the additional capacity
soon, at which point Kartet will withdraw the suit.


5. (SBU) With respect to the requested larger increase to
1200 MW, he said that EMRA's position was quite clear given
interest by about 15 Turkish companies, including major
domestic companies like Sabanci, Koc, Ak Enerji, and Zorlu.
Erenel stated that, as envisioned by existing legislation,
regulation and the GOT/EBRD Electric Strategy Paper, TEIAS as
market operator should allocate by competitive auction third
party access to transmission capacity. In response to
EnergyOff's inquiry on timing given the need for quick
implementation, Erenel stated that TEIAS would focus first on
an allocation for Iraq export and it would take it two months
to organize the auction. Embassy will pursue contacts at
TEIAS to understand this process. Note: Karadeniz aserts
that Kartet is not only the sole company with a contract with
the ITG MOE and with existing capacity in place but that its
contract with Iraq is exclusive. End Note.


6. (SBU) Comment: Kartet and the Karadeniz family were
accused, but not convicted, in the 2001 "White Energy
Scandal", which could lend support to claims that they might
have - at least initially - pursued a "special deal".
Sequential corruption investigations have made some
bureaucrats reluctant to make decisions and sign documents.
This could have contributed to slowing down EMRA's decision.
The creation of several independent institutions--the energy
and telecoms boards, the banking supervisory agency and the
Central Bank--were major reforms to insulate these
institutions from direct political influence. Given a
pattern of anti-reform elements in the GOT seeking to
undermine the independence of these boards, we need to be
sensitive to EMRA's independence. EMRA's assertion that many
large and reputable Turkish firms are interested in competing
for a tender to export electricity to Iraq indicate that
Kartet may not be the sole company capable of providing
increased electricity. End Comment.


7. (U) Iraq REOs Minimize Considered
MCELDOWNEY