VZCZCXRO6244
RR RUEHDA
DE RUEHAK #1183 1821058
ZNR UUUUU ZZH
R 301058Z JUN 08
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 6689
INFO RUEHIT/AMCONSUL ISTANBUL 4402
RUEHDA/AMCONSUL ADANA 3043

UNCLAS ANKARA 001183 
 
SENSITIVE 
SIPDIS 
 
EUR-IO/EX/PMO Sharon Russell-Nordberg 
 
E.O. 12958:N/A 
TAGS: ABUD AFIN AMGT ECON ENRG TU
SUBJECT: GOT Electricity Hikes Affect Mission Turkey's Bottom Line 
 
¶1.   (SBU) Summary.  The GOT is moving to eliminate subsidies in the 
electricity sector.  This is a welcome and necessary step for 
privatization of the sector.  The combination of high fuel prices 
(input for electricity generation) and a GOT-imposed price ceiling 
on electricity prices has resulted in debts in the sector; 
businesses operating at a loss; and lack of investment.  However, 
removing subsidies means higher electricity prices.  Higher prices 
will affect all consumers in Turkey, including the U.S. Embassy and 
Consulates in Istanbul and Adana.  See para 7 for a cost estimate on 
USG operations on Turkey.  End summary. 
 
The Rationale for Higher Prices 
------------------------------- 
 
¶2.  (U) For five years, from 2002-2007, the GOT did not raise 
electricity prices.  State Minister for Treasury Mehmet Simsek told 
us that this amounted to over 25 billion lira (approx 20 billion 
USD) in subsidies to electricity consumers.  During that time, the 
price of fuels used to generate electricity (such as oil, gas and 
coal) rose by dramatically.  As a result, state-owned electricity 
generation (EUAS), electricity price clearing house (TETAS) and 
electricity distribution companies (TEDAS) have accumulated large 
debts.  Most of these entities have been operating in the red for 
the last few years. 
 
¶3.  (U) In January 2008, perhaps in preparation for privatization of 
Turkey's distribution companies, the GOT took the first steps to 
remedy the situation.   After many contentious discussions between 
the Minister of Energy and the Prime Minister as reported in the 
press, the GOT raised the electricity price 15% for households and 
10% for industry.  Also in January, BOTAS (the state oil and gas 
pipeline company) which has been subject to world market prices all 
along because it has a near monopoly on importing gas to Turkey, 
implemented a 7.4% price increase for households and 6.5% for 
industry. 
 
Automatic Mechanism Removes Politics from Prices 
--------------------------------------------- --- 
 
¶4.  (U) Then, in February 2008, the High Planning Council (a body 
within the Cabinet of Ministers) resolved to implement an automatic 
pricing mechanism for electricity and gas.  This is good news for 
the health of the electricity sector because it takes the politics 
out of electricity and gas prices.  Also, getting the electricity 
price right will encourage investment in the sector.  In the last 
five years, investment has been severely suppressed because 
investors could make little to no profit from the GOT-set 
electricity price. 
 
¶5.  (U) The GOT named the new pricing system the "Cost-Based Pricing 
Mechanism."  According to this new mechanism, all the related State 
Economic Enterprises (SEEs) will set their tariffs three times a 
year (April, July, October), according to a methodology.  The 
increases will be indexed to a number of variables, like the foreign 
exchange rate, oil prices, and the consumer and producer price 
indexes.  According to the High Council, the Cost-Based Pricing 
Mechanism (CBPM) will take effect July 1, 2008. 
 
Gas and Electricity Prices Increase, Again 
------------------------------------------ 
¶6.  (U) As of June 1, 2008, BOTAS implemented a second gas price 
increase of 7.4% for households and 8.3% for industry. On the 
electricity side, the GOT announced a 21% increase for industrial 
consumers and 22% increase for households which will go into effect 
on July 1 along with the CBPM.  The actual rate of increase to 
consumers could be higher than these percentages, since additional 
taxes, fees and inflationary adjustments could be added. 
 
Impact on Embassy and Consulate Operations 
------------------------------------------ 
 
¶7.  (SBU) We crunched the numbers regarding the impact of two gas 
and two electricity increases on Mission Turkey's budget.  These 
numbers include the Embassy, Istanbul Consulate and Adana Consulate. 
 We estimate the costs as follows: 
 
Program: 
Gas annual cost - $17,161 
Electricity annual cost - $108,090 
 
ICASS: 
Gas annual cost - $4,570 
Electricity annual cost - $423,670