VZCZCXRO5513
RR RUEHAG RUEHAST RUEHBW RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHAK #0862/01 1261432
ZNR UUUUU ZZH
R 051432Z MAY 08
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 6180
INFO RUCPDOC/USDOC WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHIT/AMCONSUL ISTANBUL 4190
RUEHDA/AMCONSUL ADANA 2907

UNCLAS SECTION 01 OF 02 ANKARA 000862 
 
USDOE FOR CHARLES WASHINGTON 
USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG EPET EINV TU
SUBJECT: Turkey Re-launches Privatization of Electricity 
Distribution Companies 
 
REF: A) Ankara 00001 
B) 07 Ankara 00676 
 
ANKARA 00000862  001.2 OF 002 
 
 
Sensitive But Unclassified.  Please handle accordingly. 
 
¶1.  (SBU) Summary and comment.  On April 28, the Privatization 
Agency (PA) announced that the GOT's long-delayed privatization of 
electricity distribution companies would re-start.  Privatization 
was delayed in January 2007 to avoid raising electricity prices 
prior to July 2007 parliamentary elections.  The process will pick 
up roughly where it left off.  Two of the three previously tendered 
electricity distribution companies -- Baskent Electricity and 
Sakarya Electricity -- are on offer.  Serious Turkish and 
international investors, including American companies, who had 
already cleared the earlier pre-qualification stage, are invited to 
submit bids by June 10.  The GOT has also announced a second phase 
of privatization for Meram and Aras electricity distribution 
companies.  Pre-qualification bids are due May 26.  For investors, 
the risks associated with state-controlled tariffs were eased by 
recent tariff increases, but the value of these privatizations 
depends heavily on whether the GOT allows a long-awaited automatic 
price adjusting mechanism for electricity to go into effect in July, 
a month after bids on the first round of privatizations are due. 
Investors also had hoped to be able to bid simultaneously on 
distribution and generation assets, and Energy Minister Guler had 
told us that the two would go forward together (reftel A).  However, 
the PA did not mention state-owned generating assets when it 
announced these four distribution tenders.  End summary and 
comment. 
 
Privatization Strategy 
---------------------- 
¶2. (U) According to the original privatization strategy announced by 
the PA in August 2006, the GOT aims to privatize 20 of 21 regional 
electricity distribution companies and disband TEDAS, the state 
monopoly distribution company, which now has 28 million customers, 
93 billion kWh worth of electricity sales and controls 98 percent of 
Turkey's electricity distribution.  Under this model, winners of the 
tenders will not acquire TEDAS's assets.  Instead, they will "own" 
only the operating rights to the distribution networks. 
 
First Round: Choice Assets but Excludes Istanbul 
--------------------------------------------- --- 
¶3. (SBU) In the first round, the PA has decided to re-start the 
privatization process where it left off in January 2007, with one 
major exception.  This time the PA has canceled the tender for the 
Asian side of Istanbul, one of the most attractive assets.  However, 
Baskent Electricity and Sakarya Electricity, which were offered 
previously, are still very attractive to investors.  The two 
companies' regions are contiguous, making bids on both companies to 
gain economies of scale a possibility. 
 
¶4. (SBU) Baskent Electricity is one of the jewels of Turkey's 
electricity distribution networks.  Outside of Istanbul's regional 
electricity company, it has the largest customer base (2.8 million), 
distributes almost 10 percent of Turkey's total electricity to seven 
cities.  Its technical and non-technical losses (i.e. theft and 
non-payment) stand at 10 percent, which is low for Turkey.  Sakarya 
Electricity covers four cities in the industrial heartland in 
Western Turkey.  Its customer base is 1.3 million and its losses are 
also 10 percent. 
¶5. (U) Prominent Turkish holding companies, including Dogan, 
Sabanci, Enka, Zorlu, Gama and Calik, have been pre-qualified for 
the tender.  Three U.S.-owned companies -- AES Amsterdam Holdings 
B.V., Prisma Energy Global Services Ltd, and General Electric -- are 
expected to bid for the tender, together with Turkish partners. 
Other foreign companies interested include EnBW Energie 
Baden-Wurttermberg AG, EON Energie AG, Iberdola S.A., 
Novosibirskenergo Energy, and Suez-Tractabel Energy Inc. 
 
Second Round Announced 
---------------------- 
¶6. (SBU) On May 2, the PA announced that the privatization process 
for Meram and Aras electricity distribution regions would begin on 
May 5.  These two companies will be offered for the first time and 
interested bidders will need to apply for prequalification by May 
26, with a bidding deadline of July 15.  Meram is likely to be much 
more attractive than Aras.  Meram includes the central Anatolian 
cities of Kirsehir, Nevsehir, Nigde, Aksaray, Konya and Karaman.  It 
distributes five percent of Turkey's total electricity and enjoys 
low levels of losses, approximately eight percent.  Meram also is 
contiguous with the Baskent electricity distribution company, making 
 
ANKARA 00000862  002.2 OF 002 
 
 
it potentially attractive to the winner of that bid.  Aras 
distribution company is located in Eastern Turkey and includes the 
cities of Erzurum, Agri, Ardahan, Erzincan, Igdir and Kars.  Aras. 
The investment requirements in Turkey's East are high and the total 
losses at Aras are almost 30 percent. 
 
Investment Risk Tied to Tariffs 
------------------------------- 
¶7. (SBU) Comment: These will be attractive privatizations, but with 
substantial regulatory and political risk.  Turkey's regulated 
electricity prices are some of the lowest in this region.  Average 
retail price is about 8 kurus (Turkish cents) per kilowatt hour, 
while wholesale prices can be up to 18 kurus.  (Note: USD 1.00 = 
Turkish Lira 1.25)  In this formulation, either the government ends 
up subsidizing the difference (which it is unlikely to do for a 
private entity) or the company loses money.  Electricity tariffs 
were frozen from 2002 until January this year, when the GOT allowed 
increases of 10 percent for industrial users and 15 percent for 
residential customers.  Still, tariffs remain regulated and tariff 
increases are political decisions.  In February 2008, the Higher 
Planning Board promulgated a ruling to introduce an automatic, 
cost-based tariff formula that would take electricity rate decisions 
away from political officials.  However, the ruling did not include 
an implementation date.  This decision is left to the Minister of 
Energy who has said implementation will begin in July 2008.  This 
new pricing mechanism could sharply increase the value of these 
privatizations.  However, bidders on the first round of 
privatizations will have to bid without knowing if the automatic 
pricing mechanism will be allowed to go into effect.