Turkey tries for a successful energy market deregulation

ANKARA – Turkey’s state-controlled energy industry, hit by graft and failed privatizations in past years, has entered a new phase of development under IMF-backed laws liberalizing the electricity, natural gas and oil sectors. Following its worst economic crisis since World War II in 2001, Turkey approved electricity and natural gas laws in a bid to liberalize its energy market and formed the autonomous Energy Regulatory Board (EPDK). Since then the EPDK has passed many regulations and decrees to help regulate both the electricity and the natural gas markets. «Turkey has taken important steps in terms of legal adjustments to liberalize its energy markets,» said Fatih Birol, the chief economist at the Paris-based International Energy Agency. «Now these steps should be followed by transparent privatizations and good governance,» he said. In the latest step toward liberalization, President Ahmet Necdet Sezer approved on December 19 the petroleum market law, which will extend the EPDK’s mandate to Turkey’s $30 billion petroleum market. The sector employs about 1 million people in 12,000 fuel stations and over 20 distribution companies. For the first time, the law will allow refiners to form distribution companies and allow free imports and pricing in the domestic market. «EPDK will start issuing regulation on the new law in early 2004 and will implement all measures to create a competitive market,» EPDK head Yusuf Gunay said. EPDK has also speeded up natural gas grid tenders in a bid to balance Turkey’s domestic supply and demand and liberalize distribution facilities throughout the country. «In the cities where we have completed the tenders, the private sector will invest about $250 million,» Gunay said. The EPDK has tendered for natural gas distribution grids in 14 cities so far in 2003. Furthermore, state pipeline company Botas will open a tender on December 26 to sell 4 billion cubic meters (bcm) of its contract in the Blue Stream, a submarine pipeline between Turkey and Russia, to lower its market share to 20 percent by 2009. According to the natural gas law, Botas has to sell at least 10 percent of its natural gas contracts as part of a liberalization drive in the sector. The most difficult part of the liberalization process is the electricity market as a result of costly contracts signed in early 1990s, analysts said. Governments at the time signed Build-Operate (BO) and Build-Operate-Transfer (BOT) deals with many companies at high prices and with purchase guarantees from the treasury for the electricity produced. BOT projects allow the private sector to build a plant then operate it for about 20 years before transferring it to the state. The Energy Ministry and the EPDK have tried to renegotiate these agreements to pull prices down but companies so far declined to change their contracted sale prices. «To negotiate these contracts will certainly help the liberalization bid but while discussing these contracts, foreign investors should not be scared,» Birol said. «To scrap these contracts will hamper efforts to attract foreign investment in the future.» The high-priced BO and BOT contracts include mostly natural gas power plants operated by US companies Bechtel, Edison Mission Energy and Japan’s Marubeni with their Turkish partners. The current government has now transferred 33 distribution grids and a portfolio of power plants to the Privatization Administration and is expected to start tenders in 2004.