• The New Draft Law for Electricity Market
  • May 8, 2012
  • Law Firm: Erdem Erdem Law Office - Istanbul Office
  • The new draft Electricity Market Law (“Draft Law”) has been published on the web-site of Energy Market Regulatory Authority (“EMRA”). If Draft Law is passed and entered into force, the Electricity Market Law numbered 4628 (“EML”)[i] will be out of force. When compared with the EML, the Draft Law envisages some important changes and herein this article, these changes will be reviewed.

    Activities and Licenses

    The electricity market activities which can be conducted under a license are listed under Article 4 of the Draft Law as generation, transmission, distribution, wholesale, retail sale, market operation, export and import activities. Differ from the EML, while the activities of retail sale service and trade are not mentioned, “market operation” has been introduced as a type of activity.

    Under the Draft Law, the licenses and the rules to be applied to them are based on the above indicated classification of the activities. In other words, the Draft Law is structured upon the types of activities rather than the types of licenses. Coordinated with the changes in the activities, there are some significant changes with respect to the licenses and the license holders.

    Preliminary License for Generation Activities:

    As per Article 6 of the Draft Law, a preliminary license is required for commencement of generation activities. It is regulated that for the legal entities who applied to conduct electricity generation activities, a preliminary license will be issued for a certain term in order for those entities to obtain the necessary documents like permits, approvals and licenses and to acquire the property and the usufruct rights of the lands to be utilized for the establishment of the generation facility. The term of the preliminary license cannot be more than twenty four months including the force majeure events. EMRA is entitled to extend this term as per the source type and the installed capacity.

    It is stipulated in the Draft Law that the legal entities who could not obtain the above mentioned documents, certify the acquisition of the property or usufruct rights of the lands or fulfil the other legal requirements shall not be granted a generation license. In addition, until the grant of the generation license, in case of any direct or indirect change in the shareholding structure with the exception of inheritance, conduct of actions of transactions, which will lead to transfer of shares or non-fulfilment of other legal requirements, the preliminary licence will be automatically revoked. Moreover, the expiry of the license term and the bankruptcy of the legal entity, who holds the preliminary license are also listed as the circumstances, which lead to automatic revocation of the preliminary licence. In case of revocation of the preliminary license, such license holder entity or other legal entities, which have the same shareholders with at least 10% shareholding (or in case of public companies 5%) of the preliminary license holder entity cannot apply for another preliminary license for the same area within one year as of the date of revocation.

    As per the above- indicated situations with respect to the automatic revocations of the preliminary license, there is no clarity in the Draft Law regarding the timing of such revocation. On the other hand, as it is explained below, while the requirement to obtain approval of EMRA for the share transfers of the license holder legal entities is eliminated from the law, ruling that any share transfer will lead automatic nullity of a preliminary license is a contradictory proposition.

    Distribution License Holders and Other Market Activities:

    In accordance with the current EML, companies who holds distribution licenses can establish generation facilities by obtaining generation license and can enter into affiliation with the legal entities who conduct generation activities provided that they amend their agreements in accordance with the new regulations in a way to fulfil the free competition conditions. However, Draft Law sets forth an important restriction in that regard. As per Article 9 of the Draft Law, distribution companies cannot conduct activities other than distribution activities and become a shareholder to other legal entities who conduct market activities either directly or indirectly. On the other hand, while generation companies are restricted to be a controlling shareholder of a distribution company in the EML, the Draft Law provides that the legal entities who conduct market activities can be direct or indirect shareholder of a distribution company without indicating any control restriction. Without doubt, a shareholding structure providing a vertical integrity shall be reviewed in light of competition law.

    Apart from the above, the Draft Law regulates that the distribution companies who also conduct retail sale activities may only conduct retail sale activities by incorporating a new company and unbundling the corporate functions with the same shareholding structure and obtaining a supply license for new corporation regarding the said distribution area.

    Supply License:

    The wholesale and retail sale activities, which are regulated under different types of licences as “wholesale license” and “retail sale license” under the EML, are regulated under one type of licence as “supply license” under the Draft Law. As per Article 10 of the Draft Law, supply companies can conduct wholesale and/or retail sale activities without any limitation of area. In addition, it is indicated that supply companies may also import from and export to the countries with which the interconnection condition is satisfied.

    Market Operation Activity:

    The market operation activity which is included in the electricity market activities by the Draft Law is defined as the operation of the organized markets and financial reconciliation activities in those organized markets.

    As it is known, currently electricity market operation activities are conducted by Market Financial Reconciliation Center (“MFRC”) organized under Turkish Electricity Transmission Joint Stock Company (“TEIAS”) as per EML. The Draft Law sets forth that a new company to be incorporated with the title Energy Market Operation Joint Stock Company (“EPIAS”) and the market operation activities and the financial reconciliation activities of the organized wholesale electricity market will be passed and MFRC will be transferred to this company with all its permanent staff and equipment.

    The Conversion of the Auto Producer License to the Generation Licence:

    The “auto producer” and “auto producer group” licences are not explicitly regulated under the Draft Law. Instead, temporary Article 7 of the Draft Law sets forth that generation license will be automatically issued for the auto producer license holders without charging any licence fee until 31 December 2012 and the application which were made for the auto producer license are to be considered and evaluated under the terms of generation license applications.

    License Holder Companies

    The Draft Law introduce some changes on the rules regarding the management and shareholding structures of the license holder companies.

    Share Transfers in License Holder Companies:

    As it is known, according to Article 8 of the EML, in case of the occurrence of a share transfer in the shareholding of the license holder companies more than 10% or more (5% or more for public companies), merger or consolidation of those companies, change of control in those companies, acquisition, transfer or any type of change in the legal entity structure, it is necessary to obtain the approval of EMRA, prior to the relevant transaction.

    However, Draft Law eliminates such requirement of obtaining prior approval and it just sets forth a notification requirement under paragraph 3 of Article 5. According to this, license holder companies shall notify EMRA, the share transfer in their shareholding of  10% or more (5% or more for public companies), change of control in those companies and the transactions, which lead to change in the property of the generation facilities. However, EMRA shall not have the authority to approve or not to approve those transactions.

    On the other hand, distribution companies are still under the obligation to obtain the permit of EMRA, as per paragraph 4 of Article 5, with respect to the share transfer in their shareholding  10% or more (5% or more for public companies) and change of control in those companies.

    Provisions on Total Market Share:

    EML sets forth restrictive provisions such as total market share or total sale amount for the companies who conduct activities in the market. These restrictions are 10% of the previous year’s total sales of energy of Turkey for the wholesale companies and 20% of previous years calculated total installed capacity of Turkey.

    Draft Law also regulates forth those kinds of restrictions for the license holder companies. In accordance with the relevant provisions; the higher limits for the legal entities who are controlled by any real person or any private sector legal entity are;

    -  20% of the previous years calculated total installed capacity of Turkey for the generation companies to hold a total installed capacity,

    -  20% of the of the previous year’s total consumption of energy in Turkey for the supply companies to conduct wholesale and retail sale of energy, and

    -  30% of the total distributed energy in all distribution areas for the distributor companies to distribute energy in their specified areas.

    Changes regarding the Distribution Companies:

    Independent Member for the Board of Directors: Under Article 5 of the Draft Law, it is indicated that the license holders whose tariffs are subject to regulation, in other words distribution companies, shall have one independent member in their board of directors. The assignment of the rights of those companies and the appointment principles and functions of those independent members will be regulated under a secondary legislation.

    Applicable Sanctions to Distribution Companies: Under paragraph 4 of Article 29 of the Draft Law, it is set forth that the distribution licenses cannot be cancelled. Accordingly, in the event that the distribution companies do not conduct their activities pursuant to the legislation or impede their services or lower the  quality grade on an unsatisfactory scale , become insolvent or to be in a position to become insolvent, the following sanctions can be applied to those companies by EMRA:

    -  dismissal some or all of the board members and appointment of new ones,

    -  compensating the financial consideration of the unfulfilled services and investments firstly from the incomes obtained from other activities of such company, if not sufficient, from the dividend  earnings of the shareholders and lastly from the assets of the shareholders of the registered shares, and

    -  confiscation and transfer of the shares of such company to the Treasury.

    On the basis of the foregoing, EMRA will be deemed as the addressee (defendant) of the claims which will be filed against the board members appointed by EMRA to the board of directors of distribution companies due to their duties and in case of a decision for compensation, such compensation will be borne by EMRA, with a right of recourse.

    Provisions regarding Privatisation

    Implementation of Privatisation

    The provisions of EML are repeated under Article 31 of the Draft Law. In that respect, the transactions and procedures of privatisation with respect to the Turkish Electricity Distribution Joint Stock Company (“TEDAS”), Electricity Generation Joint Stock Company (“EUAS”) and the businesses, affiliates, subsidiaries, operations, operational units and assets shall be conducted by Privatisation Administration in accordance with the Law on Implementation of Privatisation numbered 4046 and dated 24.11.1994[ii] in light of the suggestions and opinions of the Ministry of Energy and Natural Resources.

    Exceptional Provision regarding Environmental Requirements:

    As per Article 9 of the Draft Law, EUAS or its subsidiaries, affiliates, business or assets or the publicly owned companies which are privatised according to the privatisation legislation are granted a grace period until the end of 2018 in order for their compliance with the environmental laws and receipt of required permits. Accordingly, it is indicated that because of non-compliance to environmental laws, within this period and even for the period prior to this period, their activities cannot be cancelled and no sanction can be applied. This exceptional provision is very important for the generation companies which are or will be subject to privatisation.

    Temporary Articles on Extension of Some Deadlines:

    Some deadlines set forth in accordance with the EML are extended with the Draft Law. Some of them are as follows:

    -  Price equalisation mechanism which is stated to be applied until the end of 2012 is extended until the end of 2015.

    -  The corporate tax and VAT exemptions which were applied until the end of 2010 to the mergers, spin-offs and transfers of the companies subject to privatisation is extended until the end of 2017.

    -  50% discount in the system utilization fees and the exemptions from stamp tax and duties during the investment periods of the generation facilities are extended until the end of 2015.

    Conclusion

    In light of the above explanation, the systematic of the Draft Law is designed based on the market activities. To that end, it is possible to say it is neatly drafted when compared with the EML. On the other hand, although it is specified to the electricity market, there are also some provisions regarding natural gas and petroleum markets. Technically, it would be more appropriate to regulate those issues to their specific laws and regulations.

    We believe that the conversion of the EMRA approval requirements to notification requirement in case of share transfers and change of control is a positive development. However, for the preliminary licenses that are set forth to be granted before the grant of generation licenses, the provision which regulates nullity in case of share transfers shall be mitigated.

     

     


     

    [i] Official Gazette 3 March 2002, Nr. 24335 Repetitious.

    [ii] Official Gazette 27 November 1994, Nr: 22124.