GOT Electricity Hikes Affect Mission Turkey's Bottom Line

UNCLAS ANKARA 001183 SENSITIVE SIPDIS EUR-IO/EX/PMO Sharon Russell-Nordberg E.O. 12958:N/A TAGS: ABUD AFIN AMGT ECON ENRG TU SUBJECT: GOT Electricity Hikes Affect Mission Turkey's Bottom Line ¶1. (SBU) Summary. The GOT is moving to eliminate subsidies in the electricity sector. This is a welcome and necessary step for privatization of the sector. The combination of high fuel prices (input for electricity generation) and a GOT-imposed price ceiling on electricity prices has resulted in debts in the sector; businesses operating at a loss; and lack of investment. However, removing subsidies means higher electricity prices. Higher prices will affect all consumers in Turkey, including the U.S. Embassy and Consulates in Istanbul and Adana. See para 7 for a cost estimate on USG operations on Turkey. End summary. The Rationale for Higher Prices -------------- ¶2. (U) For five years, from 2002-2007, the GOT did not raise electricity prices. State Minister for Treasury Mehmet Simsek told us that this amounted to over 25 billion lira (approx 20 billion USD) in subsidies to electricity consumers. During that time, the price of fuels used to generate electricity (such as oil, gas and coal) rose by dramatically. As a result, state-owned electricity generation (EUAS),electricity price clearing house (TETAS) and electricity distribution companies (TEDAS) have accumulated large debts. Most of these entities have been operating in the red for the last few years. ¶3. (U) In January 2008, perhaps in preparation for privatization of Turkey's distribution companies, the GOT took the first steps to remedy the situation. After many contentious discussions between the Minister of Energy and the Prime Minister as reported in the press, the GOT raised the electricity price 15% for households and 10% for industry. Also in January, BOTAS (the state oil and gas pipeline company) which has been subject to world market prices all along because it has a near monopoly on importing gas to Turkey, implemented a 7.4% price increase for households and 6.5% for industry. Automatic Mechanism Removes Politics from Prices -------------- --- ¶4. (U) Then, in February 2008, the High Planning Council (a body within the Cabinet of Ministers) resolved to implement an automatic pricing mechanism for electricity and gas. This is good news for the health of the electricity sector because it takes the politics out of electricity and gas prices. Also, getting the electricity price right will encourage investment in the sector. In the last five years, investment has been severely suppressed because investors could make little to no profit from the GOT-set electricity price. ¶5. (U) The GOT named the new pricing system the "Cost-Based Pricing Mechanism." According to this new mechanism, all the related State Economic Enterprises (SEEs) will set their tariffs three times a year (April, July, October),according to a methodology. The increases will be indexed to a number of variables, like the foreign exchange rate, oil prices, and the consumer and producer price indexes. According to the High Council, the Cost-Based Pricing Mechanism (CBPM) will take effect July 1, 2008. Gas and Electricity Prices Increase, Again -------------- ¶6. (U) As of June 1, 2008, BOTAS implemented a second gas price increase of 7.4% for households and 8.3% for industry. On the electricity side, the GOT announced a 21% increase for industrial consumers and 22% increase for households which will go into effect on July 1 along with the CBPM. The actual rate of increase to consumers could be higher than these percentages, since additional taxes, fees and inflationary adjustments could be added. Impact on Embassy and Consulate Operations -------------- ¶7. (SBU) We crunched the numbers regarding the impact of two gas and two electricity increases on Mission Turkey's budget. These numbers include the Embassy, Istanbul Consulate and Adana Consulate. We estimate the costs as follows: Program: Gas annual cost - $17,161 Electricity annual cost - $108,090 ICASS: Gas annual cost - $4,570 Electricity annual cost - $423,670