The Evolution of Turkish Electricity Market Regulation Dr. Refik Tiryaki

1. COMPETITION AND REGULATION INNETWORK INDUSTRIES6th annual conference - 22 November 2013 - Brussels, Belgium The Evolution of Turkish Electricity Market Regulation Dr. Refik Tiryaki

2. outline Historical introduction 1st step reforms (Introducing private participatition) 2nd step reforms (new regulatory design / 4628) Reasons templates creation of new market structure policy documents Last reform attempt (6446) Comments on reform efforts

3. Historical introduction 2 kW watermill in 1902 OttomanElect. Corp. - 15 MW Coal PP - 1915 Concessioncontracts RepublicanErastarts in 1923 Concessioncontractscontinued + newentries Policyshiftingafter 1930s Stateinstitutions, decentralisedelectricitysystem During 1940s expropriationmovement 1953 1st NationalEnergyCongress 1963 Ministry of Energyand Natural Resources 1970 TurkishElectricityInstitution (TEK) (verticallyintegratednationalincumbent – exceptdistribution) 1982 incorporation of distributionto TEK

4. Landmark dates 1923 Foundation of the Republic of Turkey 1953 National Energy Congress which had shaped subsequent developments until 1984 1963 Foundation of the Ministry of Energy and Natural Resources (MENR) 1970 Foundation of TEK, national incumbent (incorporation of distribution, in 1982) 1984 Introduction of the reform policies within BOT structure for electricity industry 1993 New statutory legislation for BOT projects for utility industries 1996New regulatory, later on statutory attempt for generation segment via BO Projects 1999 Constitutional amendments for public services to be pursued via private law contracts 2001 New phase for electricity market reform policies via the Law, No: 4628 2004 First Strategy Document initiating a new path for the implementation of reform policies 2009 Second Strategy Document initiating partial restoration for reform policies 2013 Enhancement of electricity market reform policies via the Law, No: 6446

5. 1st step reformsintroducing private participatititon Reformsfor ‘capital search for investments’ + growing faith in the market economy inadequate investment budget(new + maintanence) Reformsinitiated in 1984 viatheLaw, 3096 BOT : fornewgenerationinvestment TOOR : forrehabilitation and operation of existing generation and distribution facilities auto-producer licence : enhancing captive generation capacity into industrial facilities New attempt in 1993 viatheLaw,3996 BOT contracts for various infrastructure sectors withnewincentives

6. 1st step reformsintroducing private participatititon such as private law contracts, direct treasury guarantees Constitutional Court Decision on the Law, 3996 and public service concept. A new attempt via the Decree, No: 96/8269 Introducing BOO model for thermal PPs Conseil d’Eta’s Stay of Execution Decision in 1996 New statutory initiation of BOO model in 1997 via the Law, 4283. Success with BOO model, 1999 Constitutional Amendments about private law contracts for public services .

7. 1st step reforms introducing private participatititon Considerable amount of generation investments acquired via BOT (2500 MW) and subsequent BOO (6000 MW) schemes during 1990s However, the reform efforts didn’t brought the effect of lifting financial burden from Treasury create favourable investment climate for private enterprises despite their introduction in 1984.

8. 2nd step reforms–reasons– As a result of previous reform efforts Financially overburden on Treasury stemming from design deficiency inefficient operation of the distribution system TEDAS’s financial weakness stems from high level of technical and non-technical –mainly theft – losses repeating macroeconomic crisis Lack of competition Loopholes such as unsolicited projects, investor completed feasibility studies, false demand scenarios. New concepts at international level Success of ideology and politics towards wider liberalisation Sympathetic regulators, gas turbines, and poor accountability of SOEs. Application of competitive markets theory at European level.

9. 2nd step reforms– templates– Jamasb& Pollitt, 2005, 13.

10. figures Installed capacity reached to 60 GW (2013) Consumption was 242 TWh (2012) Increase in electricity demand is about 7 - 8 % Monetary value of consumption is about 30 billion US$

11. 2nd step reformsnew regulatory design Restructuring or creation of new market structure Market model is based on voluntary bilateral agreements completed with the balancing mechanism. Unbundling existing TEAS into 3 companies TEIAS for transmission EUAS for generation TETAS for wholesale supply + TEDAS for distribution and retail sale; regional DISCOs stipulated . Competition and Markets Eligible consumer application 20% market share limitatiton Retail sale and retail sale services activities and licences for wider playing field and private law application to all activites.

12. 2nd step reformsnew regulatory design Regulatory reform Creation of EMRA as independent administrative agency ( Board + Agency), Regulated third party access to the network, without discrimination, independent transmission system operator for transmission, tariff applications for network activities, No price regulation in the wholesale & balancing markets. Ownership reforms Designation of market activities and relevant licences generation – transmission – distribution – wholesale – retail sale – retail sale services– import & export Marketactivities performed under particular licence. Eachactivityorfacilityrequires saparatelicence.

13. Policy documents SP2004 Strategy Document Designating method, timetable and preparatory design of the sector for privatization works. Three modalities (i) multi-year tariff implementation periods, (ii)a tariff equalization mechanism (iii) vesting contracts to be signed among EUAS, TETAS and regional DISCOs. Crucial role of competition in the market approach pushed back, and privatization of energy assets gained primary role. Modalities distorted all costs and price signals (see fig 2). Dominant position of state entities with predatory pricing operandi distorted all likely investment decisions. Amendments to Law No: 4628 and transition period initiated.

14. Policy documents SP2009 Strategy Document New mechanisms; capacity mechanism, security of supply and necessary mechanisms in relation, e.g. central contest, extension of the transition period, vesting contracts, reorganization of generation assets, separation of activities of regional distribution companies, multi-year tariff scheme with price equalization mechanism. Significant policy orientations,e.g. improvement of transmission system conditions and realization of UCTE/ENTSO-E membership, natural resource utilization targets, targets for state generation assets investments, efficiency and saving targets. Importance of this document, the roadmap about restoration of the functioning voluntary bilateral contracts market, foremost aim of the market reform in 2001. Voluntary bilateral contracts market completed by the end of 2011.

15. 6446 Two main aims during drafting period deepening the liberalization process re-orienting EMRA to its regulatory function. Restructuring – Unbundling of retail sale and distribution activitiesentrenched. New boundaries for distribution and retail sale companies. Neither any company engaged in a market activity nor a distribution company cannot directly become a partner in respected counter one. Distribution companies cannot perform any activity other than distribution.

16. 6446 Restructuring – Regional distribution companies are obliged to operate the distribution system “in a manner facilitating competition for electricity generation and sale”. “provide services on a non-discriminatory basis among equal parties” to the system users, connected or to be connected to the system. EMRA empowered to divest and/or terminatethe ownership due to market power criteria Competition and Markets introducing a new market activity, market operation activity, covers the operation of any OWEM. an OWEM may be an OTC market, an organized market, a market bounding some segments of those beside ancillary services market which entrusted to TEIAS.

17. 6446 Competition and Markets creating a new company for new trading platform, EPIAS, a spun off company from TEIASs market opertor branch empowering national stock company (BIST) for derivative markets, The law abolished retail sale services activities and incorporated several competitive activities, such as counter reading and billing, maintenance services into distribution activity.

18. 6446 Regulatory Reform Law regulates tariffs for both network and commercial activities. Market operation and last resort supply tariffs are newly introduced tariffs to the system. Market operation tariffs based on the principles of meeting revenue requirements and financial sustainability of EPIAS for operating an OWEM. Last resort supply will aim to encourage consumers to conclude bilateral contracts with suppliers as introducing interim utilization and expensive prices.

19. 6446 Ownership Reform The law stipulated two new licences and repealed two existing ones Market operation licencecovers operating an OWEM which primarily covers the operation of a trading platform Supply licence, covers operating both in wholesale and retail sale segments of market. Wholesale and retail sale licencesrepealed A new licensing method for generation licences, i.e. interim licence fo max. 2 years period prior to generation licence. Expropriation powersof EMRA is transferred to related public authorities

20. 6446 Ownership Reform New procedural guarantees for licence applicants, such as notification of clear and full justifications when their application rejected. Threshold for unlicensed generation activities increased one fold to 1 MW. The Council of Ministers is authorized to increase the threshold limit to five fold.

21. Comments Regulations complies, to a great extent, with EU acqui requirements Convergence between electricity and natural gas markets was taken into consideration during the organization of trading platforms. IRA are massively empowered via market power criterion to regulate and supervise the market. There are some controversial issues, bearing risk to bring complications about economic freedoms, constitutional limitations or discretionary power of administrative institutions. Exemption of keeping books and accounts and regulation of auto producers may negatively affect EMRAs competence on market power surveillance, by posing risk to create potential market power. National tariff mechanism with cross subsidies is under application until the end of 2015, possibly till 2020.

22. Comments Evolution of the electricity market regulation displays an ‘ebb and flow’ character. Turkish electricity market regulation mainly focuses on alleviating measures to existing symptoms rather than curing original problems. The prevailing political commodity character of electricity has always played an important role both for drafting and implementation periods of documents, whether legal or political.

23. Thankyouforyourinterest. refiktiryaki@gmail.com