COURT RULING THREATENS TO SUSPEND TURKISH POWER

UNCLAS SECTION 01 OF 02 ANKARA 004786

SIPDIS

EXIM FOR PAMELA ROSS AND MARGARET KOSTIC
OPIC FOR R CORR AND C CHIS
USDOE FOR CHARLES WASHINGTON
USDOC FOR 4212/ITA/MAC/CPD/DDEFALCO

SENSITIVE

E.O. 12958: N/A
TAGS: ENRG EINV BEXP TU EXIM OPIC
SUBJECT: COURT RULING THREATENS TO SUSPEND TURKISH POWER
PLANT OPERATIONS

Sensitive But Unclassified. Please handle accordingly.


1. (SBU) Summary: In a surprise ruling in late July, the
Council of State (Danistay) issued a suspension ruling for
the Electricity Sales Agreement of Enka's Izmir power plant.
Enka is optimistic that the court ruling will be overturned,
given the power plant's significant share in Turkey's
electricity generation, as well as the price and purchase
guarantees in its contract. In addition to the minor share
U.S. Intergen has in the Enka power plant, OPIC and EXIM
have credit exposure related to the three Enka "BO" plants.
Although likely to be resolved, this problem sends another
negative message to potential foreign investors that rules
are subject to arbitrary risk in the Turkish market. End
Summary.


2. (SBU) The Public Management Development Center (KIGEM),
run by long time anti-privatization gadfly Mumtaz Sosyal,
filed a lawsuit against the State Electricity Trading
Company (TETAS) regarding the Electricity Sales Agreement
(ESA) of Enka's Izmir power plant signed in 1998, on the
grounds that this ESA qualifies as a concession contract and
should be reviewed by Danistay. After several years of
dismissal and reversals by various administrative courts,
the case made its way to Danistay, which ruled on July 10
that the implementation of the ESA be suspended until
Danistay reviews the agreement. In principle, the power
plant would have to suspend its operations if TETAS is
unable to overturn the Danistay ruling in time. The Izmir
plant, like two other natural gas fired Enka plants in Gebze
and Adapazari, was established on a Build-Operate (BO)
basis.


3. (SBU) The three power plants, which account for 20
percent of Turkey's total generation capacity, have been
model projects for the GOT, due to their stable generation
practices and low prices-- unlike the higher-priced Build-
Operate-Transfer (BOT) plants, which have been on the GOT's
black list for years. U.S. Intergen currently has a 10
percent share in the three Enka power plants, but is
planning to sell its remaining share to Enka by the end of

2005. OPIC and EXIM exposure in the power plants will
likely continue after Intergen's withdrawal. KIGEM filed
similar lawsuits against other four other BO projects in
Turkey, so the Izmir case could form a problematic precedent
if the Danistay overturns the Izmir plant's agreement.


4. (SBU) Enka believes it is well protected by its contract
with the GOT, which includes price and purchase guarantees.
Relevant GOT agencies (Turkish Pipelines Company BOTAS and
the Treasury) submitted opinions supporting TETAS' objection
to the Danistay ruling. Enka officials told us TETAS would
not be able to replace the electricity it buys from Enka's
plant if the suspension were to be implemented, putting
Izmir at risk of black-outs. BOTAS is the sole take or pay
supplier of the Enka plant and it has related international
liabilities to its gas suppliers. The Treasury is bound by
a "take or pay" clause in the agreement, and would have to
pay for the electricity the plant could generate, even if
the ruling would suspend the plant's operations. Given the
united support by all related GOT agencies, both Enka
officials and Embassy contacts are optimistic that the
Danistay ruling can be overturned (or ignored). According to
the ruling, TETAS would have to implement the suspension by
August 22, if it fails to overturn it by that time. Embassy
contacts believe a likely Council of Minister ruling could
permit the Izmir Plant to continue its operations "for
public benefit," thereby annulling the Danistay ruling.


4. (SBU) COMMENT: WE ARE OPTIMISTIC THAT ENKA PLANTS'
OPERATIONS IN TURKEY WILL CONTINUE WITHOUT INTERRUPTION,
GIVEN THE UNUSUAL SHOW OF UNITY OF GOT AGENCIES IN SUPPORT
OF THESE FACILITIES AND RECOGNITION OF TURKEY'S DEPENDENCE
ON THESE AND OTHER BO'S FOR CRITICAL ELECTRICITY SUPPLY.
HOWEVER, THE DANISTAY RULING SENDS YET ANOTHER NEGATIVE
MESSAGE TO POTENTIAL INVESTORS IN TURKEY: BEWARE LEGAL
RISKS, UNCERTAINTIES AND UNFORESEEN CHALLENGES OR CHANGES IN
THE RULES. WHILE THE GOT HAS APPLIED PRESSURE ON HIGHER
PRICED BUILD-OPERATE-TRANSFER (BOT) PROJECTS, THEY CONTINUE
TO PURCHASE THEIR ELECTRICITY OUTPUT PER GUARANTEED
CONTRACTS.

McEldowney