VZCZCXRO2815
RR RUEHDA
DE RUEHAK #1914/01 3091550
ZNR UUUUU ZZH
R 041550Z NOV 08
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 7883
INFO RUEHIT/AMCONSUL ISTANBUL 4938
RUEHDA/AMCONSUL ADANA 3357
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RHEHAAA/NSC WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 ANKARA 001914 
 
SENSITIVE 
SIPDIS 
 
EEB FOR SPECIAL ENVOY FOR EURASIAN ENERGY GRAY 
EEB FOR ENERGY COORDINATOR MANN 
EUR FOR DAS BRYZA 
 
E.O. 12958:N/A 
TAGS: ECON ENRG TU
SUBJECT: TURKEY: UNPOPULAR GAS PRICE INCREASES GO FORWARD 
 
REF: ANKARA 1183, ISTANBUL 495 
 
¶1.  (SBU) Summary.  On November 1, the Turkish gas import monopoly 
BOTAS announced a 22.5% price increase in gas for households and 22% 
for industry.  This is the fifth gas price increase in 2008 and 
brings the total gas price increase to over 70% so far this year. 
At a press conference on November 3, Energy Minister Guler said the 
implementation of an automatic pricing mechanism for electricity and 
gas left the GOT no options but to allow prices to increase, and 
also blamed the recent lira devaluation.  Under the new pricing 
mechanism, only the Prime Minister can block a price increase. 
However, BOTAS' tenuous financial health also forced the GOT to 
allow the increase.  This was a tough decision for the GOT in 
advance of March 2009 local elections and should help reassure 
investors that the GOT no longer wants to meddle in electricity and 
gas pricing decisions.  End summary. 
 
¶2.  (SBU) BOTAS's announcement to raise gas prices by 22.5% for 
households and 22% for the industry is the fifth gas price increase 
since the beginning of 2008.  In January, the increase for 
households was 7.4% and industry 6.5%; in June, 7.4% and 8.3%; in 
August, 16.88% and 18.77%; in October, 4.55% and 4.69% respectively. 
 The cumulative increase in gas prices since January 2008 was 72.7% 
for households and 74.9% for the industry.  Since about half of 
Turkey's electricity is produced with natural gas, the gas price 
increase is expected to bring about a double digit increase in 
electricity prices in January 2009.  (Note: Electricity prices have 
already risen about 60% this year. End note.) 
 
¶3.  (SBU) Turkey implemented the automatic pricing mechanism July 1, 
¶2008.  This mechanism is basically a cost pass-through mechanism and 
an important step in liberalizing gas prices in Turkey.  The price 
increases have been dramatic because electricity (and gas) prices 
were held constant from 2002-2007.  The increases earlier in the 
year were aimed at shoring up the financial health of the sector 
prior to privatization.  Surprisingly, the large gas price increase 
comes only months before scheduled local elections in March 2009. 
According to the formula, gas prices are adjusted monthly while 
electricity prices are adjusted quarterly.  The price changes go 
forward automatically, unless the Prime Minister intervenes. 
 
¶4.  (SBU) Energy Minister Guler and BOTAS Chairman Saltuk Duzyol 
held a press conference on November 3 to respond to criticism over 
gas price increases.  Guler said the GOT had no control over the 
world oil prices and fluctuating exchange rates and was taking the 
steps required by Turkey's automatic pricing mechanism.  Guler added 
that the oil prices are now in a downward trend, and without further 
depreciation of the lira, gas prices would drop in the in the first 
quarter of 2009.  Duzyol noted the 33% devaluation in lira against 
USD in the past month, and compared favorably the 150% increase in 
world oil prices in the past 10 months to BOTAS action to increase 
gas prices by 73% for households and 75% for industry.  Duzyol 
claimed that the gas price increases in Turkey remained below the 
increases in European countries. 
 
¶5.  (SBU) Another impetus for this gas price increase is the 
strained financial situation of BOTAS.  The Government of Turkey is 
one of the largest debtors to BOTAS.  The city of Ankara owes BOTAS 
over USD 1 billion.  The city had hoped to pay its debt using the 
proceeds from privatization of the city gas distribution network. 
Unfortunately, the winning bidder recently withdrew from the deal 
because his promised bank financing was withdrawn.  We have also 
heard that BOTAS owes money to the Treasury.   Electricity 
generators, like Unit Energy Systems S.A., have told us they have 
received letters from the Treasury demanding that payments owned to 
BOTAS for gas purchases be sent to the Treasury to resolve BOTAS's 
debts. 
 
 ¶6.  (SBU) Comment: The automatic pricing mechanism is new and 
investors are waiting to see how it will be implemented.  This 
latest large and unpopular gas price increase, coming shortly before 
an important local election, should help instill confidence in 
investors that the GOT no longer wants to meddle in pricing 
electricity and gas.  Additionally, Turkey's market liberalization 
is continuing.  One of the criticisms we hear from investors who are 
considering entering the market is the unpredictability of future 
electricity and gas prices.  Turkey has a wholesale spot market for 
electricity but it represents less than 20% of the total electricity 
market.  Because of the tight electricity supply, the price in this 
market is higher than the price between state-owned generators and 
distributors.  According to Ministry of Energy expert Ozturk 
Sevintop, Turkey will create a futures market for electricity in 
2011 to give greater predictability to future utility prices.  This 
also may help bring investors into the sector. End comment. 
 
ANKARA 00001914  002 OF 002 
 
 
 
WILSON