COMPETITION AND REGULATION IN NETWORK INDUSTRIES6TH ANNUAL CONFERENCE - 22 NOVEMBER 2013 - BRUSSELS, BELGİUM

THE EVOLUTİON OF

TURKİSH ELECTRİCİTY MARKET REGULATİON

DR. REFİK TİRYAKİ

outline

Historical introduction 1st step reforms (Introducing private participatition) 2nd step reforms (new regulatory design / 4628)

Reasonstemplatescreation of new market structure policy documents

Last reform attempt (6446) Comments on reform efforts

Historical introduction

2 kW watermill in 1902 Ottoman Elect. Corp. - 15 MW Coal PP - 1915 Concession contracts Republican Era starts in 1923

Concession contracts continued + new entries Policy shifting after 1930s State institutions, decentralised electricity system During 1940s expropriation movement 1953 1st National Energy Congress 1963 Ministry of Energy and Natural Resources 1970 Turkish Electricity Institution (TEK)

(vertically integrated national incumbent – except distribution) 1982 incorporation of distribution to TEK

Landmark dates1923 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

1996 New 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

1st step reforms introducing private participatititon

Reforms for ‘capital search for investments’ + growing faith in the market economy inadequate investment budget (new + maintanence)

Reforms initiated in 1984 via the Law, 3096 BOT : for new generation investment TOOR: for rehabilitation and operation of existing

generation and distribution facilities auto-producer licence : enhancing captive generation

capacity into industrial facilities New attempt in 1993 via the Law, 3996

BOT contracts for various infrastructure sectors with new incentives

1st step reforms introducing 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 .

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.

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.

2nd step reforms – templates–

Restructuring Vertical unbundling of generation, transmission,

distribution and retail supply activities Horizontal splitting of generation and retail

supply Competition and markets

Wholesale market and retail competition New entries in generation and retail supply

Regulatory reform

Establishing an independent regulator Provision of third party network access Incentive regulation of transmission and

distribution networksOwnership

reform

Allowing new private actors Privatising existing publicly owned businesses

Jamasb& Pollitt, 2005, 13.

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$

2nd step reforms new 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.

2nd step reforms new 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 licencesgeneration – transmission – distribution – wholesale – retail sale – retail

sale services – import & export

Market activities performed under particular licence. Each activity or facility requires saparate licence.

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.

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.

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 activities

entrenched. 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.

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 terminate the 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.

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.

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.

6446 Ownership Reform

The law stipulated two new licences and repealed two existing ones

Market operation licence covers 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 licences repealed A new licensing method for generation licences, i.e. interim

licence fo max. 2 years period prior to generation licence. Expropriation powers of EMRA is transferred to related

public authorities

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.

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.

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.

Thank you for your interest.

refiktiryaki@gmail.com