This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 ANKARA 004288 
 
SIPDIS 
 
SENSITIVE 
 
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
DOE FOR CHUCK WASHINGTON 
TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER 
 
E.O. 12958: N/A 
TAGS: ENRG EPET ETRD IZ TU
SUBJECT: TURKEY'S ELECTRICITY EXPORTS TO IRAQ - REGULATORY 
CHALLENGES 
 
REF: A. ANKARA 3528 
     ¶B. ANKARA 3263 
     ¶C. ANKARA 1003 
     ¶D. 04 ANKARA 6195 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1.  (SBU) SUMMARY: The U.S., Turkish, and Iraqi Governments 
share the goal of increasing exports from Turkey to Iraq. 
Turkey's Kartet Company currently exports 200 MW and seeks to 
increase in two steps: 1) to 350 MW, generally using existing 
capacity, and 2) to 1200 MW, asserting that it has the sole 
contract with the ITG MOE to put this in place with new 
investment.  Embassy has played a facilitating role in 
assisting Kartet to overcome numerous obstacles.  At the same 
time, we need to be sensitive to energy regulator EMRA's 
independence as Turkey aims to liberalize and improve its 
investment environment, in line with its economic reform 
program.  EMRA is willing to license Kartet's first proposed 
increase, but argues for a competitive tender for allocation 
of Turkey's transmission capacity for the larger proposed 
increase.  Such a tender would ensure a level playing field 
among companies given the interest of a number of reputable 
Turkish firms.  Kartet may not be the sole solution to the 
Iraq electricity challenge.  End Summary. 
 
-------------------------- 
Let's Make the Deal Happen 
-------------------------- 
 
¶2.  (SBU) From the original idea in 2003 to date, the GOT 
MENR (Ministry of Energy) has strongly supported Kartet 
Company's (Karadeniz Toptan Elektrik Ticaret A.S.) project to 
export electricity to Northern Iraq (Reftels).  The need to 
increase exports from the current 200 MW has been reaffirmed 
by the Turkish and Iraqi Governments.  An MFA contact told 
EnergyOff that the MFA has strongly supported the increase 
for strategic reasons.  Embassy has closely followed the 
issue, particularly since there was a temporary stoppage last 
October (Ref D), because the contractual heavy fuel oil (in 
partial payment) from Iraq had never been delivered from Iraq 
(due to security and financial problems).  Kartet has 
scrambled to acquire (more expensive) fuel oil from Turkish 
refineries and electricity from the Turkish grid.  Embassy 
has heard claims in the press and in the industry, that 
Kartet may have engaged in a "special deal" with MENR. The 
Energy Regulatory Authority (EMRA), itself engaged in a 
bureaucratic turf battle with the GOT to maintain its 
independence, has claimed that Kartet had illegally acquired 
electricity from the grid.  In March 2005, GOT and EMRA 
passed legislation and implemented regulation meant to 
clarify and facilitate exports of electricity. 
 
¶3.  (SBU) Kartet's Orhan Karadeniz told EnergyOff on July 19 
that in his view EMRA was the biggest obstacle to increasing 
exports.  He said that for the first time Kartet had been 
able to acquire some some fuel oil in Iraq (6,000 tons, 
versus the contractual 30,000 tons/month).  Karadeniz was 
also optimistic that the issue of a bank guarantee for the 
first year of the take or pay contract from Iraq would be 
solvable (Kartet's condition for putting in place incremental 
investment for the larger deal, potentially including the 
Iraq portion).  He thanked Embassy for facilitating contact 
with U.S. OPIC and EXIM; he was optimistic about OPIC, but 
noted that EXIM only provided 180-day credit for Iraq. 
Acquisition of fuel oil in Iraq (related to security and 
administrative issues within Iraq), keeping the ITG MOE 
focused on implementing the contract, and financing of 
investment in Iraq remain obtacles to increasing exports.  In 
a conversation July 26 with econ specialist, Karadeniz 
reported that the Iraqis had started repair and maintenance 
on their side of the border, improving the prospects for more 
transmission.  Both Karadeniz and other industry observers 
are skeptical about electricity from Iran or from Russia (via 
Georgia) given technical and EU directive constraints (Turkey 
is close to joining the European synchronized UCTE grid), but 
he thought these schemes could be distractions.  President 
Putin reportedly raised the idea of Russian electricity 
exports to Iraq via Turkey in his recent meeting with PM 
Erdogan. Karadeniz reminded EnergyOff that Kartet's proposal 
for the smaller increase included transmitting some 
electricity from Turkey to Iraq via Syria. 
 
----------------------- 
We Can't Play Favorites 
----------------------- 
 
¶4.  (SBU)  EMRA Electricity Market Head Murat Erenel 
confirmed to EnergyOff on July 21 that EMRA was facing 
pressure from the GOT to move forward on renewing Kartet's 
license for electricity export to Iraq.  Erenel explained 
that the EMRA Board had indeed made a favorable preliminary 
ruling on renewing Kartet's license in an increased amount to 
350 MW, despite Sabanci and other Turkish firms expressing an 
interest (Ref B).  In implementing the license, EMRA had 
received a positive, but slightly ambiguous opinion on 
transmission capacity availability from the Turkish 
transmission company (TEIAS).  He said that EMRA's final 
board approval on implementing the license awaited a legal 
opinion on Kartet's contract with the ITG.  Meanwhile, press 
reported July 26--and Karadeniz confirmed--that Kartet sued 
EMRA in June because of the slowness of the regulatory 
approval, a fact that neither side had mentioned to energyoff 
only last week.  But Karadeniz said he is still talking with 
EMRA and is hopeful it will authorize the additional capacity 
soon, at which point Kartet will withdraw the suit. 
 
¶5. (SBU) With respect to the requested larger increase to 
1200 MW, he said that EMRA's position was quite clear given 
interest by about 15 Turkish companies, including major 
domestic companies like Sabanci, Koc, Ak Enerji, and Zorlu. 
Erenel stated that, as envisioned by existing legislation, 
regulation and the GOT/EBRD Electric Strategy Paper, TEIAS as 
market operator should allocate by competitive auction third 
party access to transmission capacity.  In response to 
EnergyOff's inquiry on timing given the need for quick 
implementation, Erenel stated that TEIAS would focus first on 
an allocation for Iraq export and it would take it two months 
to organize the auction.  Embassy will pursue contacts at 
TEIAS to understand this process.  Note: Karadeniz aserts 
that Kartet is not only the sole company with a contract with 
the ITG MOE and with existing capacity in place but that its 
contract with Iraq is exclusive. End Note. 
 
¶6.  (SBU) Comment: Kartet and the Karadeniz family were 
accused, but not convicted, in the 2001 "White Energy 
Scandal", which could lend support to claims that they might 
have - at least initially - pursued a "special deal". 
Sequential corruption  investigations have made some 
bureaucrats reluctant to make decisions and sign documents. 
This could have contributed to slowing down EMRA's decision. 
The creation of several independent institutions--the energy 
and telecoms boards, the banking supervisory agency and the 
Central Bank--were major reforms to insulate these 
institutions from direct political influence.  Given a 
pattern of anti-reform elements in the GOT seeking to 
undermine the independence of these boards, we need to be 
sensitive to EMRA's independence.  EMRA's assertion that many 
large and reputable Turkish firms are interested in competing 
for a tender to export electricity to Iraq indicate that 
Kartet may not be the sole company capable of providing 
increased electricity.  End Comment. 
 
¶7.  (U) Iraq REOs Minimize Considered 
MCELDOWNEY