Professional Documents
Culture Documents
Turkey’s Experience
with Greenfield Gas
Distribution since
2003
May 2007
Formal Report 325/07
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Formal Report 325/07
Turkey’s Experience
with Greenfield Gas
Distribution
since 2003
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Contents
1. Introduction .................................................................................................................... 1
3. Review of Turkey’s Progress with Greenfield Gas Distribution Projects since 2003 .............. 9
The Drive for Gasification of all Major Cities ................................................................ 9
Participation in the Distribution Tenders and the Winning Bids .................................... 12
Licensees’ justifications for the low winning bids ........................................................ 13
Licensees’ Progress in Meeting their Investment Requirements .................................... 17
4. Major Drivers in Turkey’s Recent Experience with Greenfield Gas Distribution Projects ...... 27
5. Primary Constraints on Further Progress in Turkey’s Greenfield Gas Distribution Projects ...... 35
Some Shortcomings of the Licensing Process ............................................................. 35
Constraints on Expanding the Licensee’s Consumer Base .......................................... 36
Difficulties Related to BOTAS ...................................................................................... 38
iii
TURKEY'S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
Tables
Figures
Figure 2.1: Major Steps in a Gas Distribution Project ............................................................. 5
Figure 3.1: Progress in Gas Penetration in New Distribution Regions, 2005 .......................... 10
Figure 3.2: Current Penetration Ratio (Current Subscribers to Potential
Subscribers, %) ............................................................................................. 10
Figure 3.3: Residential Gas Consumption in New and Old Distribution Regions in
2001-05 ...................................................................................................... 11
iv
CONTENTS
Figure 3.4: Winning Bids in Gas Distribution Tenders (US cents/kWh) over
2003-05 ...................................................................................................... 12
Figure 3.5: Transportation Fees (US cents/kWh) Across Distribution Regions ........................ 16
Figure 3.6: Estimated Residential Penetration Rate (Number of Meters/Number of
Dwellings in the Beginning of 2006, %) ......................................................... 21
Figure 3.7: Completion Rate of Distribution Company Investments, End-2005 (%) ................ 22
Figure 4.1: Share of Industrial and Residential Gas Consumption (%), 2005 ......................... 28
Figure 4.2: Turkey’s Gas Distribution Regions ..................................................................... 30
Figure 4.3: Relative Prices of Select Fuels Consumed by Households, 2005 ........................... 32
Figure 4.4: Industrial and Household Gas Prices ($/toe), 2005 ............................................ 32
Boxes
Box 2.1: BOTAS’ Contract Transfer – Implications for Gas Distribution ................................... 3
Box 2.2: The Tendering and Licensing Process for Gas Distribution Licenses in Turkey ............. 6
Box 3.1: The Case of the Lowest Winning Bids .................................................................... 18
v
Acknowledgments
This study was commissioned by the Energy together the data in a presentable structure.
Sector Management Assistance Program Selma Karaman (ECCU6) and Yukari Tsuchiya
(ESMAP) and was prepared by Adnan (ECSSD) assisted in editing and finalizing
Vatansever. The task of preparing and finalizing the report.
the report was managed by Sameer Shukla
(ECSSD). The research, data collection and The report benefited tremendously from
analysis, and background interviews with comments, advice and guidance from World
various stakeholders were carried out by Adnan Bank peer reviewers, Franz Gerner (ECSSD) and
Vatansever. Ranjit Lamech, Gurhan Ozdora Bent Svensson (COCPO), to whom the task
and James Moose (ECSSD) contributed team is particularly grateful.
significantly to the finalization of the report.
Kalpana Seethapalli from the Energy Mining The team also wishes to acknowledge
Sector Unit (EASEG) provided valuable the assistance from ESMAP in producing
assistance in finalizing the report and bringing this report.
vii
Acronyms, Abbreviations
and Conversions
ix
Executive Summary
Turkey’s New Model for Greenfield This study focused on two broad areas related
Gas Distribution since 2003 to Turkey ’s progress in greenfield gas
distribution projects: EMRA’s ability to finalize
Much of Turkey’s recent success in rapidly gas distribution tenders and the level of
expanding gas distribution projects throughout investment completed by license holders.
the country is the result of the decision to adopt
a new model for developing gas distribution. Since 2003, EMRA has seen unprecedented
The new model is an outcome of the Natural success in finalizing tenders which aim to
Gas Market Law (NGML) (Law#4646, adopted spread gas consumption in every major city of
xi
TURKEY'S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
Turkey. By the end of 2005, the regulatory • However, initial requirements are
agency was able to finalize the tenders for relatively easy to meet: Both requirements
gas distribution in 35 separate regions. (for six and 18 months) are set in very broad
It announced an ambitious plan to finalize terms and do not require licensees to invest
24 additional tenders in 2006, seven of specific amounts in the projected distribution
which were completed in the first two networks. Neither do they require the
months of 2006. licensees to connect a certain minimum
number of consumers. As a result, meeting
EMRA’s initiative has been met with considerable the requirements is relatively easy;
interest among Turkey’s private companies
willing to undertake gas distribution projects. • Progress in meeting medium-term
The interest has varied across tenders, but the requirements is substantial: Licensees
overall trend has been an initial downturn after face a much tougher requirement in the
the relatively low winning bids in 2003, followed medium-term: within the first five years of
by a significant upward swing in 2005. There their operation, they are required to connect
has been a noteworthy increase in the number every willing potential consumer in their
of participants in the distribution tenders during settlement zone (imarli area), if the
the last year. Moreover, some large Turkish requested connection is economically and
conglomerates, which had shelved their plans technically feasible. Most companies have
for involvement in gas distribution following the been involved in rapid investment in
initial low winning bids, decided to return. infrastructure. Many of them have reported
significant penetration rates in their
The higher level of competition has been respective regions. In some distribution
reflected in the winning distribution margins, regions, more than 50 percent of the
which reached record low levels in 2005. potential consumers have already been
Interestingly, despite widespread criticism about connected. Meanwhile, a comparison of
the low level of winning bids at the tenders, licensees’ cumulative investments so far with
distribution companies have continued with their projected investment volume for the
their investment projects. Furthermore, growing duration of their licenses provides
experience in the field has not barred these an additional indicator of progress.
companies from accepting even lower Accordingly, for most regions for which data
distribution margins in new tenders. are available, the level of investment far
exceeds the current penetration ratios
In terms of the progress made in meeting concerning potential consumers; and
the investment requirements set for distribution
companies, it is possible to arrive at the • It may, however, be early to predict success
following conclusions. for distribution projects overall. First, no
licensee of the new distribution regions has
• Licensees have been able to meet their been operating for more than three years.
investment requirements so far: Winners As a result, it is too early to judge their ability
of distribution tenders are required to to meet their five-year requirements. Second,
commence investment within six months of figures on gas connections and penetration
acquiring a distribution license. In addition, rates are subject to bias. This is partly due
they are required to complete their first gas to the lack of a clear definition of what needs
connections within 18 months. There have to be done by the licensees in their first five
been no reports of licensees failing to reach years of operation. In addition, licensees are
these requirements; potentially able to demonstrate relatively
xii
EXECUTIVE SUMMARY
higher penetration ratios by keeping low Yet, it is clear that the main reason for the
estimates about the potential number of success in attracting private investment
consumers, as well as by connecting the into greenfield gas distribution rests with
larger commercial consumers. Finally, a real EMRA. There is a wide consensus among
criterion for success would appear in the representatives of Turkey’s gas sector that the
form of an absence of complaints by presence of a well structured tendering process
potential consumers about not being under the guidance and supervision of an
connected by the licensees, when they independent regulatory body has constituted
appear in a region deemed as economically the principal driver for Turkey’s rapid progress
and technically feasible. So far, there have with greenfield gas distribution projects.
been no such disputes, but this is partly The process has had several major strengths:
because licensees have initially focused on
areas with higher population densities. The • EMRA’s success in establishing a simple and
main challenge for licensees will be to transparent bidding system for gas
maintain their successful performance after distribution tenders;
they turn their attention toward regions
(within their existing settlement zone) where • EMRA’s ability to remain largely autonomous
gas connection costs are relatively higher. from political pressures;
xiii
TURKEY'S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
xiv
EXECUTIVE SUMMARY
depending on whether it is a central heating be lower, and usually range from 500 to
system or an individual one. Quick estimates 1,000 YTL (US$376-752). Data show that
based on discussions with some licensees and central heating is still quite limited in buildings,
some industry associations suggest that the and such buildings are also primarily restricted
cost for individual heating systems (with to the larger cities. Licensees in other cities,
combined functions for space heating, therefore, may have to deal with consumers
water heating, and cooking) could vary who will require individual heating. The
between 2,000 and 3,500 New Turkish Liras challenge, therefore, will be to convince
(YTL) (US$1, 500-2,630). The cost of a central consumers of the long-term benefits of the
heating system (serving the same purpose) high upfront costs. In some cases, licensees may
per subscriber depends on the number of units be required to provide financing to consumers,
in a building. Such costs are typically found to to enable them to bear the upfront costs.
xv
1. Introduction
As in early 2006, residents of about 24 gasification, completed investment, and the
distribution regions in Turkey have obtained ability of licensees to meet their requirements;
access to natural gas. The number of gasified
cities is expected to more than double within • Perspectives of distribution companies on
less than two years. This represents a major major issues related to Turkey ’s new
breakthrough for Turkey in its experience distribution model;
with greenfield gas distribution projects.
Until only 2003, in spite of a significantly • Major drivers of Turkey’s recent experience
long experience with city gasification with gas distribution; and
projects (dating back to the late 80s), only
• Current and potential challenges faced
six cities’ residents had the opportunity to use
by the sector.
natural gas.
In addressing these issues, the report largely
The objective of the report is to provide an
constitutes a follow-up to a previous the World
assessment of Turkey’s progress with gas
Bank study (conducted in mid-2004) which
distribution projects. The report aims to
examined Turkey ’s experience with gas
provide a detailed analysis of Turkey’s current
distribution. Meanwhile, due to the relatively
experience with gas distribution, which
rapid advance in most of the distribution projects
can possibly serve as an example for
in 2004-05, the report benefits from the
greenfield gas distribution for other countries
availability of a larger number of cases.
– especially for those that are undergoing
gas market liberalization. In addition, it aims The report is based on a field study conducted in
to highlight some major challenges which, Turkey in December 2005. It reflects on
if addressed, will help to ensure successful consultation with distribution companies
progress in Turkey ’s gasification in the representing 26 distinct distribution regions (out
next decade. of the total of 35 as in the end of 2005). It has
also benefited from meetings with officials at
The report examines the following:
EMRA, Turkey’s energy market regulatory
• Specifics of Turkey ’s new model for authority; BOTAS, the national pipeline operator;
greenfield gas distribution; companies in charge of feasibility studies;
Dosider, Turkey’s Natural Gas Equipment
• Progress in gas distribution projects through Manufacturers and Businessmen Association;
the end of 2005 regarding the level of and other participants in the gas sector.
1
2. Turkey’s Greenfield Gas
Distribution Model since 2003
Current Natural Gas Market transmission and sales, down to the level of
in Turkey supply to the distribution companies and to
eligible consumers are in the hands of BOTAS.
Before discussing the greenfield distribution Market risk is currently borne largely by
model, it may be pertinent to reflect upon BOTAS, and ultimately by the Government as
the current industry structure in the Turkish owner of the company. Exports and
gas market. private new entrant wholesale is yet to
begin, although EMRA attempted to carry out
At present, BOTAS has monopoly over the a contract transfer program in 2005 in
gas industry down to the gates of the keeping with the requirements of the Law
distribution business. So, all gas imports, (See Box 2.1).
NGML #4646 requires BOTAS to gradually transfer its import contracts to private companies.
Each year, BOTAS needs to transfer at least 10 percent of its total contracted volumes.
The objective is to reduce BOTAS’ allowable import share of the national gas market to
20 percent by 2009.
To realize this ambitious goal, BOTAS made several attempts at contract transfer in 2005. Its
latest initiative came on November 30, 2005, when it successfully completed a tender for
part of its import contracts. This was largely an outcome of the consent of Turkey’s main gas
supplier (Gazprom) for its involvement in the impending contract transfer negotiations with
the tender participants. Thus, Gazprom has authorized a contract release for 4 bcm of its
total supply to Turkey. This is for the gas contracted (between Gazprom and BOTAS) in 1998
and transported to Turkey through Bulgaria. Authorizations for Turkey’s other gas import
contracts have not been made.
The success of BOTAS’ tender is shown by the presence of four applicants who submitted
their bids after obtaining a for an import license from EMRA, as well as Gazprom’s initial
consent to the import contract transfer under question. However, the contract transfer process
for these companies is not complete. Some procedures remain before EMRA’s approval is
complete, and the approval of the competition board is needed. BOTAS is in the process of
submitting information about the bidders, at the tender, to Gazprom. Following this, the
companies will start negotiations with Gazprom for gas delivery terms. Some of the final
3
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
steps involve a contract transfer agreement between Gazprom and BOTAS and a gas sales
agreement between the Russian supplier and the private companies.
A successful realization of BOTAS’ initiatives for contract transfer will provide a major boost
to wholesale competition in Turkey’s gas market. However, its implications for gas distribution,
in the short- and medium-term (six to eight years from now), will be minimal:
• As the law prohibits cross-subsidization between various segments of the gas chain,
any distribution company planning to get involved in wholesale will not be able to
cross-subsidize its gas distribution business. Moreover, the legislation prohibits
distribution companies from executing any market activity other than distribution. As
a result, accepting low distribution margins at EMRA’s gas distribution tenders, based
on prospects for involvement in wholesale, will not bear results for the gas distribution
segment of their business.
While wholesale competition development will not have significant implications for gas
distribution in the near future, the gas distribution business itself is likely to emerge as an
essential force behind wholesale competition. Accordingly, the Law requires gas distribution
companies to procure not more than 50 percent of their gas from a single supplier. This rule
has not been enforced due to BOTAS’ wholesale monopoly. However, if contract release is
successfully accomplished, gas distribution companies will need to purchase part of their gas
from the new wholesalers. As a result, distribution companies are likely to play a significant
role in fostering wholesale competition.
The contract transfer has not been completed yet. The Greenfield Gas
Distribution Model
BOTAS has spun off its distribution businesses into
separate regional companies. Further, in keeping Following the enactment of the NGML (#4646),
with the principles of the Law, BOTAS has begun Turkey has adopted a new model for developing
separating its accounts for the transmission, its gas distribution networks. This model appears
natural gas wholesale, gas storage, and to be one of the primary reasons for the rapid
petroleum businesses. EMRA has also awarded progress which has recently occurred in
separate tariffs for each of these businesses. the gasification of Turkey ’s major cities.
In several cities (Istanbul, Ankara, Izmit and
The next phase of this gradual restructuring Adapazari), gas distribution has been
process will be the establishment of undertaken by municipally owned companies,
independent importers and wholesalers, once though some major steps for their privatization
the contract transfers are completed. These have been taken (and have been completed in
wholesalers will then compete with BOTAS for Adapazari). As an example of another model,
sales to distribution companies and to eligible gasification of two cities (Bursa and Eskisehir)
consumers. According to the Gas Sector Strategy was undertaken by the state-owned pipeline
Note (September 2004), this was expected to monopoly BOTAS. These two companies were
happen by 2006, but has been delayed. subsequently privatized by the national
4
TURKEY’S GREENFIELD GAS DISTRIBUTION MODEL SINCE 2003
privatization agency, which has helped to boost initiated by public entities following
investment for expanding the existing network government decisions;
in these two cities.
• Private companies, rather than public
The following are the factors which distinguish entities, have fully undertaken investment in
Turkey’s new model from those adopted previously. these greenfield gas distribution projects and
their operation. As a result, EMRA reports
• The process involving the distribution projects that there has been no need for public
is regulated by an independent energy financial involvement in this process so far.
regulatory body (EMRA). The previous two Financial difficulties experienced in the public
models were initiated in a period when EMRA sector had often been a cause for investment
was not yet established, which led to heavy delays in the previous models;
state interference in the process of regulating
• The gas distribution projects are undertaken
the gas distribution sector. Yet, since the
in the context of a gas market which is
establishment of EMRA, there has been an
rapidly moving toward liberalization; and
increasing tendency toward reaching
uniformity in the rules governing various gas • The new model appears to have sparked
distribution entities; off significant interest among investors,
resulting in a nearly massive drive for
• A competitive tender is at the core of gasification projects throughout Turkey.
the process which has been designed to
a l l o w f o r t h e g r e a t e s t s i m p l i c i t y, Figure 2.1 and Box 2.2 briefly summarize
transparency, objectivity and speed. the major aspects of the tendering and
This is at odds with the previous two licensing process concerning the new gas
models, where greenfield projects were distribution model.
Tender Acquisition
Prequalification Tender
Announcement of License
Commencement
of Investment
(Wthin Six
Months)
5
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
Box 2.2: The Tendering and Licensing Process for Gas Distribution Licenses in Turkey
Tender’s stage
• EMRA determines the size of the distribution region and announces a tender. Companies
can apply within a specified time span – usually between two and six weeks following the
tender announcement. A commission established by EMRA evaluates the applicants using
two general criteria: financial viability and experience (Natural Gas Market Distribution
and Customer Services Regulation [NGMDCR], Article 9);
• The minimum equity requirement for applicants has been set at 1 million YTL1
(US$752,000);
• Prequalified applicants are invited by EMRA to obtain the tender documents; and
• Prequalified applicants willing to participate at the tender are required to submit bid
bonds, whose value is determined in the tender announcement.
• Bidding is evaluated by a single criterion – the lowest distribution margin (unit service
and depreciation charge) offered by an applicant. The margin is fixed for the following
eight years;
• EMRA determines the three lowest bids and the relevant bidders are asked to revise
their bids; and
• The winner is invited to submit a performance bond (at the amount determined in the
tender document) and to obtain the distribution license (NGMDCR, Article 9). The
performance bond has ranged from 500,000 to 5,000,000 YTL (US$376,000-3,760,000).
• The licensee acquires the license for 30 years. With EMRA’s approval one year before the
license’s expiration, the licensee has the right to apply for an extension of the license
term. The licensee is allowed to sell the distribution network in its possession before the
license’s expiration with EMRA’s approval;
• The licensee collects connection fees from residential subscribers, the amount of which is
defined in the distribution license. It is usually about US$180 for the first 200 m2 per
household, and commercial/public consumers who use gas for heating purposes.
Supplementary connectione fees (usually US$150) apply per every 100 m2 of additional
space. Connection fees collected from industrial users and “eligible consumers” are higher,
based on a rule that the distribution company may charge up to 10 percent above the
6
TURKEY’S GREENFIELD GAS DISTRIBUTION MODEL SINCE 2003
connection cost. Commercial consumers, according to EMRA, are charged in the same
way as industrial ones, though there is an ongoing disagreement on the interpretation
of the relevant regulation;
• The licensee receives a distribution margin per kilowatt-hour (kWh) of gas sold to its own
consumers. When providing a gas transportation service to “eligible consumers,” the
distribution company is allowed to charge the amount equivalent to the distribution margin
(EMRA Decision #397);
• Licensees operate at fixed distribution margins during the first eight years, after which
EMRA will apply a price cap;
• Less significant sources of income for a licensee include fees related to approval, testing,
and commencement of internal installations designed by installation companies; and
• Upon signing of a contract with a consumer, the licensee may collect deposits from
consumers only once to address potential nonpayment problems (NGMDCR, Article
38). As in mid-2006, the deposit for households which plan to use gas as a part of
a central heating system is 132 YTL (US$99.2) per subscription unit – an area of up
to 200 m 2; for individual households planning to use gas for oven and water heating
only, 32 YTL (US$24.1); and for combined (heating and water heating) purposes,
162 YTL (US$121.8).
• A distribution company must inaugurate the gas connection of a certain area in its
distribution region within 18 months;
• In the first five years, the licensee is required to connect all consumers within the region of
its responsibility to the distribution network upon their request; however, this obligation
depends on the availability of capacity of the system and on whether the requested
connection is economically and technically feasible. In the event of a dispute between a
prospective consumer and a licensee, the feasibility of the projected connection is
determined by EMRA (NGMDCR, Article 36, and Natural Gas Market License Regulation
[NGMLR], Article 27); and
• It is obligated to ensure adequate network capacity according to the demand in the area
under its responsibility (NGMDCR, Article 56).
• Unbundling of activities: Legal entities are allowed to engage in more than one market
activity upon obtaining a separate license. However, legal entities engaged in gas wholesale
activity are allowed to perform neither transmission nor distribution (NGMLR, Article 31);
7
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
• Licensees are required to prepare annual balance sheets and income statements regarding
their investment process, and submit them to EMRA. This is in addition to progress reports
submitted periodically (NGDCSR, Article 28-29); and
• For submission to EMRA upon request, licensees have to maintain certificates obtained
from the Turkish Statistics Institute (TSI), certifying that the equipment and material used
in the infrastructure are in compliance with the relevant legislation and standards
(NGDCSR, Article 28).
8
3. Review of Turkey’s Progress with
Greenfield Gas Distribution
Projects since 2003
The Drive for Gasification of all six provinces in which residents had obtained
Major Cities access to gas before the initiation of EMRA’s
tendering process in 2003, the total number
Once the Natural Gas Law came into force, of new distribution regions where gas
EMRA initiated a vigorous preparation of consumption has commenced5 reached 20 by
tenders which aimed to spread gas the end of 2005 (see Table A 2 in Annex I).
consumption in every major city of Turkey. In Figure 3.1 shows the absolute numbers of
2003, the first year of implementation of this current and potential subscribers, while Figure
new model of greenfield gas distribution, EMRA 3.2 displays the penetration ratio, that is, the
completed the tenders for 13 distribution ratio of current to potential subscribers. Taken
regions. In 2004, the number of finalized together, Figures 3.1 and 3.2 show the
tenders dropped to seven, while in 2005, 15 impressive, albeit varied, progress of gas
new regions were tendered, bringing the total penetration in the 20 new distribution regions
number of completed tenders to 35.2 At the end by the end of 2005. In the period 2003-05,
of 2005, EMRA announced an ambitious plan investment started in more than 10 other
to finalize 24 additional tenders in 2006,3 distribution regions, though previous gas
seven of which were completed in the first connections were still pending.
two months of 2006.
This is impressive growth, given that major
EMRA’s progress with distribution tenders has investment activities only started in 2004.
been successfully matched with a growing Turkey’s current experience stands out among
number of cities which have secured access to a number of developing (and some industrial)
natural gas.4 Accordingly, while there were only countries which embarked upon greenfield gas
2
As a result of the time span between EMRA’s announcement of a tender’s winner and its approval of the distribution license
of the winner, the number of distribution licenses granted each year stood at: two in 2003, 18 in 2004, and seven in 2005.
Additionally, in 2003, EMRA issued seven distribution licenses to distribution companies which had initiated their investments
before the new Natural Gas Law took effect.
3
The tender announcement for 12 of these was already made in 2005.
4
“City with an access to natural gas” is defined by the presence of a gas distribution infrastructure serving any number of
households and commercial and public consumers.
5
Commencement of gas consumption in a particular distribution region refers to the inauguration of the first gas connections
to households and commercial and public consumers by a distribution company. The number of consumers at the end of the
first month following commencement may vary depending on the season. The number of distribution regions where gas
consumption has commenced is different from numbers provided by BOTAS, which refer to provinces where the transmission
network has been completed. Accordingly, as in the end of 2005, there were 40 provinces (out of Turkey’s total of 81)
where gas was available to large consumers.
9
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
distribution projects. One common problem the number of subscribers has remained only
experienced in a number of countries (such as a few thousand. Another common problem has
Bulgaria, Bolivia and Tunisia) has been the slow been the concentration of greenfield gas
speed of gasification. Thus, after more than a distribution projects in a select number of large
decade of activity by gas distribution companies, cities, beyond which any gas distribution-
250,000
Potential Number of Subscribers
225,000
Number of Subscribers
200,000
175,000
150,000
125,000
100,000
75,000
50,000
25,000
Usak
Konya
Yalova
Sivas
Corum
Balikesir
Gemlik
Kayseri
Kutahya
Inegol
Kirikkale-Kirsehir
Gebze.
Corlu
Aksaray
Bandirma
Konya-Eregli
Erzurum
Samsun
Catalca
Karadeniz-Eregli-Duzce
Source: EMRA.
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Usak
Konya
Yalova
Corum
Balikesir
Gemlik
Sivas
Inegol
Kayseri
Kutahya
Kirikkale-Kirsehir
Catalca
Konya-Eregli
Bandirma
Gebze.
Corlu
Aksaray
Erzurum
Samsun
Karadeniz-Eregli-Duzce
Source: EMRA.
10
REVIEW OF TURKEY’S PROGRESS WITH GREENFIELD GAS DISTRIBUTION PROJECTS SINCE 2003
related investments has remained minimal (as association for gas-burning appliances,
in the case of China, Brazil, India, Indonesia, has reported that residential consumption
Mexico and Greece). reached 5.1 bcm in 2005, up from 4.3 bcm in
2004. In fact, in December 2005, Turkey’s
EMRA expected the number of cities with access
monthly residential consumption topped 1 bcm.
to natural gas will be as high as 55 by the end
Most of this increase, however, appears to have
of 2006. Having completed the tendering
resulted from the ongoing investment in gas
process for nearly all designated distribution
distribution projects in Turkey’s old distribution
regions in its more industrialized provinces
regions, which cover some of the most
(primarily in western Turkey), the attention has
populated cities.6 Only a small portion of this
shifted toward the provinces in the Black Sea
increase has been associated with the greenfield
region, eastern and south-eastern Turkey.
projects in new cities (Figure 3.3). For instance,
Meanwhile, the recent growth in the total residential consum ption in all of the new
number of cities with access to natural gas gas distribution regions stood at 90 million cubic
has occurred in conjunction with a meters in 2005. However, their share in Turkey’s
substantial rise in Turkey’s overall residential overall residential gas consumption is expected
gas consumption. Accordingly, Dosider, the to grow substantially in the following years.7
Figure 3.3: Residential Gas Consumption in New and Old Distribution Regions in 2001-05
5.3
Old Regions
3.3
bcm
2.3
1.3
0.3
-0.7
2001 2002 2003 2004 2005
Source: Dosider.
6
In Istanbul alone, 400,000 new households were subscribed to have access to gas in 2005, bringing the total number of
subscribers to just over 3 million. Other cities with distribution projects initiated before Natural Gas Law #4646 also witnessed
continuing growth in their number of residential subscribers.
7
EMRA has reported that the total number of gas subscribers in the new distribution regions was only 199,094 as at the end
of 2005. Thus, their contribution to Turkey’s overall gas consumption was mainly at the industrial-user level.
11
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
Figure 3.4: Winning Bids in Gas Distribution Tenders (US cents/kWh) over 2003-05
18
0.25
16
Winning Bid (US cents kWh)
0.15 10
8
0.1
6
4
0.05
2
0 0
Usak
Konya
Polatli
Sivas
Corum
Balikesir
Malatya
Kutahya
Kayseri
Inegol
Yalova
Yozgat
Izmir
Sanliurfa
Kirikkale-Kirsehir
Corlu
Bilecik-Bolu
Edirne-Kirklareli-Tekirdag
Denizli
Canakkale
Catalca
Bandirma
Aksaray
Samsun
Manisa
Isparta-Burdur
Gemlik-Umurbey
Karadeniz Eregli-Duzce
Gebze.
G. Antep-Kilis
Konya Eregli
Nigde-Nevsehir
Erzurum
K. Maras
Karabuk-Kastamonu-Cankiri
Winning Bid (US cents/kWh) No. of Bidders at Tender Ave. Bid Amount in the Year (US cents/kWh)
Source: EMRA.
12
REVIEW OF TURKEY’S PROGRESS WITH GREENFIELD GAS DISTRIBUTION PROJECTS SINCE 2003
distribution margin to be applied after the • In 2005, there was a sharp turnaround in
eighth year. Companies accepting lower interest in the distribution tenders. Thus, eight
distribution margins have usually (though out of 15 tenders conducted in 2005
not always) expected a greater increase in attracted nine or more bidders (up to 14).
the distribution margin in the new phase of Another indication of the growing interest
operation in their regions. in the tenders was the participation of some
large Turkish conglomerates who had
Yet, a closer look at the tenders completed so shelved their gas distribution plans for a
far reveals that the number of bidders and the while following the initial low winning bids,
winning bid have been closely interrelated. Thus, as well as some large companies which
a higher level of competition at the tender has expressed interest for the first time.
often resulted in lower bids, which cannot The growing interest was partly a result of
always be justified by referring to the tendering some large and industrialized
distribution companies’ expected scale distribution regions (such as Izmir and
economies. Based on this correlation between Thrace). But the interest in smaller and less
the level of competition and the size of the industrialized distribution regions was
winning distribution margin, it is possible to markedly higher than in the previous year.
observe the following trends related to Turkey’s The high level of competition translated into
gas distribution tenders so far: comparatively low distribution margins.
While the average winning margin for the
• The initial interest in gas distribution tenders 15 tenders conducted in 2005 was as low
was significantly high in terms of both the as 0.052 cents/kWh, in three of the tenders,
number of participants as well as the the winning companies agreed to a “0” cent/
presence of some of Turkey ’s largest kWh distribution margin. Moreover, in one
conglomerates. Thus, the first tender (for the (Thrace), the winner agreed to abstain from
Kayseri distribution region) attracted 18 any gas connection fees from households
bidding companies, with 14 bidders at the in the first five years and make a payment
second tender (for Konya). After the fifth of 2.55 million YTL (about US$1.9
tender (for Gebze.), most of the tenders million) for the 30-year distribution license.
attracted two or three bidders. Given the
initial high interest toward the tenders, the Licensees’ justifications for the low
average distribution margin for the 13 winning bids
tenders conducted in 2003 was relatively
low: 0.093 cents/kWh; The considerably low distribution margins
accepted by the winners at EMRA’s distribution
• In 2004, the applicants’ interest in the tender tenders have resulted in heated debates about
never managed to reach the levels which the viability of these projects. Criticism of the
were present when the process was initiated low level of margins and skepticism about the
in 2003. The number of applicants varied distribution projects’ future has been abundant.
between one and seven. The average Probably, the sharpest criticism has come from
distribution margin for the seven tenders Turkey’s older distribution companies operating
conducted throughout the year was relatively in cities such as Istanbul, Ankara and Izmit,
higher than in 2003 – 0.115 cents/kWh. which have been operating at margins close to
EMRA recorded some of the highest winning the levels found in the European Union (EU). In
distribution margins within this period: fact, a comparison of the distribution margins of
0.239 cents/kWh (for Gemlik) and 0.236 these companies and those resulting from EMRA’s
cents/kWh (for Aksaray); and tenders reveals a considerable discrepancy.
13
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
Izmit 0.492
Adapazari 0.492
Bahcesehir 0.492
Istanbul 0.424
Ankara 0.410
Eskisehir 0.235
Bursa 0.235
8
The distribution margin for these five old distribution regions is set in terms of local currency per kWh. As a result, the
conversion rate of US$1=1.33 YTL is used.
14
REVIEW OF TURKEY’S PROGRESS WITH GREENFIELD GAS DISTRIBUTION PROJECTS SINCE 2003
pointed out two major developments they companies are well aware of the pitfalls
believe should address the widespread of operating at low distribution margins.
skepticism regarding their projects: Yet, they have continued applying for new
tenders and have submitted bids which
• Investments have continued rapidly appear to be even lower than the initial
despite low margins. Nearly all bids in 2003.
distribution companies have proceeded
rapidly with their investment programs Gas distribution companies have given a
following the tender for the respective number of reasons for accepting these low
distribution region. In a number of distribution margins.
regions, gas distribution companies claim
to have reached penetration rates • Significant revenues from gas
significantly above their most optimistic transportation services to “eligible
scenarios, which has come as a surprise consumers” 9: Many of the distribution
to most observers. For instance, licensees licensees have acquired ownership over
in Corum, Konya and Catalca have been high-pressure pipelines in their respective
able to subscribe more than half of their regions, or are in the process of negotiating
potential consumers. In Kayseri and with BOTAS on the transfer of such assets.
Erzurum, gas distributors have subscribed As a result, licensees perform transportation
about a quarter of the potential services through high-pressure pipelines to
consumers, which is above their initial industrial consumers and power plants.
targets. No company has expressed any This is in addition to their distribution
major concern about not being able to services within their designated regions.
meet the requirements determined by its Thus, when EMRA issued a binding
distribution license because of low opinion (Decision #397 issued in 2004)
distribution margins (see “Licensees’ which allowed them to charge “eligible
Progress in Meeting their Investment consumers” transportation fees which are
Requirements”); and equivalent to their distribution margins, as
“eligible consumers” usually account for the
• Despite growing experience in the field, bulk of most regions’ overall gas demand,
the tendency among distribution they have been transformed into a major
companies has been to accept even source of revenue for the distribution
lower distribution margins. Several companies. In this respect, this represents a
distribution companies that were subject to major difference between older and
criticism about submitting “unreasonably” new distribution companies. Accordingly,
low bids at the distribution tenders, have licensees in the older distribution regions
already completed sizable distribution receive comparatively higher distribution
networks (see Table A2 in Annex I). In margins, but are subject to transportation
comparison to the early stage of EMRA’s fees which are nearly a fraction of this
tenders, they have acquired significant margin. For instance, as in 2006, six of
knowledge and experience in Turkey’s gas the older distribution companies are allowed
distribution business, and, therefore, such to charge up to 0.068 cent/kWh for
9
The Law defines eligible consumers as those whose annual consumption is above 15 mcm/year. In each distribution region,
this threshold is subject to a revision after the end of the fifth year of operation of the licensee.
15
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
transportation services.10 In contrast, 15 out first eight years of their projects. Estimating
of 35 new distribution companies are able investment costs, however, is complicated,
to charge transportation fees (in some cases as licensees’ capital expenditure data refers
significantly) above those charged by to overall project costs rather than money
Turkey ’s six old gas distributors (see invested for residential connections.
Table A3 in Annex I). Figure 3.5 shows the Moreover, part of the infrastructure serves
transportation fee schedule of all 41 a range of consumers apart from residential
distribution companies; subscribers. As a result, there is an upward
bias in the projected investment costs per
• Connection fees as a means for covering residential and commercial and public
most of investment costs: With very few subscribers. Licensees in charge of 18
exceptions, the licensees collect a connection distribution regions have provided a
fee standing at US$180 per residential rough estimate for their investment costs.
consumer (up to 200 m 2 ). 11 These The ratio of cumulative investment costs
connection fees are essential for covering per residential consumer (as at the
the investment costs of the licensees in the end of the fifth year of operation) range
0.3
0.25
0.2
0.15
0.1
0.05
0
Usak
Konya
Yalova
Yozgat
Ankara
Malatya
Corum
Balikesir
Sivas
Polatli
Adapazari
Izmit
Izmir
Manisa
Inegol
Kayseri
Kutahva
Sanliurfa
Denizli
Edirne-Kirklareli-Tekirdag
Kirikkale-Kirsehir
Canakkale
Bilecik-Bolu
Corlu
Gebze.
Bursa
Istanbul
Catalca
Samsun
Bandirma
Aksaray
Erzurum
Isparta-Burdur
Konya Eregli
Karadeniz Eregli-Duzce
Eskisehir
G. Antep-Kilis
Gemlik-Umurbey
Bahcesehir
Nigde-Nevsehir
K. Maras
Karabuk-Kastamonu-Cankiri
Old Distribution Regions; New Distribution Regions with Low Transportation Fees
New Distribution Regions with High Transportation Fees
Source: EMRA.
10
According to EMRA Decision #616, this is the fee collected from consumers obtaining transportation services but who are
not direct consumers of Igdas (Istanbul), Ego (Ankara), Izgaz (Izmit), Bahcesehirgaz (Bahcesehir), Eskisehir (Esgaz) and
Bursagaz (Bursa). Agdas (Adapazari) has been awarded the right to charge a transportation fee of up to 0.111 cents/kWh.
11
The exceptions are for several regions where licensees agreed to lower their connection fees. As at the end of 2005, there
were three such distribution regions – Edirne-Tekirdag-Kirklareli, Gaziantep and Denizli.
16
REVIEW OF TURKEY’S PROGRESS WITH GREENFIELD GAS DISTRIBUTION PROJECTS SINCE 2003
between US$144 and US$288. The average • Lower investment and operation costs:
is US$186.2 for the 18 distribution Representatives of distribution companies
regions. 12 Naturally, regions with low have indicated that nearly 15 years of
population and a dominant role for experience with gas distribution in Turkey
industrial consumers will have a higher has significantly reduced investment and
investment cost per residential subscriber. operation costs. Unlike the pioneers in the
Thus, most licensees claim that the industry, new distributors have access to
US$180 connection fee determined by a sizable domestic industry,13 securing
EMRA will be enough or close enough to nearly all of the required equipment and
cover their costs related to residential materials for investing in a distribution
consumers. Yet, the relation between network. Igdas also claims to benefit from
investment costs and connection fees per a large reduction in investment costs.14 In
subscriber is closely related to the stage addition, they have rarely needed to
of project development. Accordingly, initial rely on importing management and
costs per subscriber are relatively high and expertise from abroad, which has
tend to decrease as the number of helped to further reduce their costs.
connected consumers per given km Finally, they have expressed concerns
of completed infrastructure grows. about ongoing cross-subsidization
Subsequently, when licensees start among some of the municipally owned
connecting households in areas with lower distribution companies, which has resulted
densities, connection costs will grow in higher operating costs; and
again. As a result, licensees face the
prospect of connecting areas with lower • Benefiting from horizontal integration:
population densities, where investment Few companies have justified their low
costs will exceed connection fees; winning bids by pointing to plans to get
involved in electricity distribution in their
• A long-term perspective on the gas gas distribution regions. Such horizontal
distribution initiatives projects: Gas integration is common in some EU
distribution companies have consistently countries and aims to reduce some
indicated that they have acquired licenses operating costs.
which secure the right for operating their
Licensees’ Progress in Meeting their
networks for at least 30 years. As the
Investment Requirements
currently low distribution margins are valid
only for the first eight years, many of them EMRA has determined three major milestones
hope to benefit from a significant rise in regarding the investment requirements for
these margins in the remaining period of licensees. This section examines the licensees’
their license (see below); ability to meet these requirements.
12
The estimates for connection costs per subscriber belong to distribution companies, which have presented data. These are
only estimates and the exact value for each licensee may appear different (though most likely in the provided range, as
variations in terms of costs are minimal across the country).
13
Based on Dosider’s estimates, at the end of 2005, there were 20 indigenous companies producing gas pipes, 50 companies
producing gas valves, and four companies producing gas meters.
14
One source claims that Igdas’ costs have dropped from US$1,000 to US$150 per residential connection in 15 years
(“Dogalgaz Dagitim Piyasasinda Tek Rekabet Unsuru Fiyat Olmamali,” PetroGas, July 20, 2004).
17
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
Companies which have agreed to operate with the lowest distribution margins for the first eight years
(0 cents/kWh) have justified their low bids by referring mainly to the industrialized nature of their
respective regions. The associated size of the overall gas demand is considered a potential source
of significant distribution margins and transportation revenues for the future. The most surprising
winning bid has come from a company which has agreed to collect no connection fees or to keep
them at extremely low levels (such as US$30). This is in addition to “0” distribution margins. Its
justification has been based on the following:
• The large share of industrial consumers (for example, 92 percent in Thrace and 41 percent in
Gaziantep at the end of the fifth year);
• Expectations for a significant revision in the distribution margins after an eight-year period
(2 cents/kWh or more anticipated for the post8th-year period);
• The opportunity to provide gas to industries belonging to the same holding company which
operates the gas distribution project in the respective region*;
• Plans to get involved in other parts of the gas chain (such as upstream and wholesale) which may
reduce overall operating costs*; and
• The process of enhancing a positive public image for the holding company.
* As the Natural Gas Law and associated regulations prohibit cross-subsidization, some of these
expected benefits may not be justified.
18
REVIEW OF TURKEY’S PROGRESS WITH GREENFIELD GAS DISTRIBUTION PROJECTS SINCE 2003
15
As a result, consumers are required to hire companies other than the distribution company in charge of their region for this
type of installations.
19
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
Table 3.2: Alternative Estimates for Residential Penetration Rates (Based on the Number
of Dwellings and Installed Meters)
Note: (a) estimates are provided by TSI based on 2001 data about the number of residential water subscribers in the given
cities. Residential water subscription figures are used as a potential measure for the number of dwellings. Such figures are
available only for the select number of cities; and (b) estimates are provided by TSI based on the 2000 census on the number
of dwellings in all of Turkey’s municipalities.
20
REVIEW OF TURKEY’S PROGRESS WITH GREENFIELD GAS DISTRIBUTION PROJECTS SINCE 2003
Based on data on the actual number of While, for most regions, current penetration
dwellings and installed meters for residential rates appear to be significantly low, most
purposes, the penetration rate for each of the companies estimate that by the end of their
cities for which information is available shown five-year period, their penetration rates will be
in Figure 3.6 (and Table 3.2) appears equivalent to (or in some cases even above)
significantly lower in Figure 3.2 (and Table A2 those in Istanbul and Ankara. According to
in Annex I). This is partly because some of these licensees’ feasibility studies, the average
dwellings are not in the officially recognized residential penetration rate expected at the
settlement zone (imarli alan) and licensees are end of the fifth year of operation in 25
not liable to connect them. In some of the areas, distribution regions stands at 69.5 percent.
however, the high penetration rates are In the older distribution regions reaching
associated with the connection of larger penetration rates of 80 percent took as long
consumers, such as commercial and public as 15 years to achieve, and so new
buildings, rather than achieving significant distribution companies hope to have a
progress in residential penetration. Each of these more accommodating attitude from the
consumers are equivalent to multiple regulatory agency.
50
45
40
35
30
25
20
15
10
5
0
Usak
Konya
Corum
Balikesir
Sivas
Gemlik
Yalova
Corlu
Karadeniz-
Catalca
Bandirma
Konya-Eregli
Eregli-Duzce
Note: Residential penetration rate calculated on the basis of licensees’ estimates of the number of meters installed as a
proportion of number of dwellings.
(sometimes hundreds) subscription units. This Figure 3.7 displays the completion rate for
can provide a slightly upward bias about investments of distribution companies
progress in achieving high subscription rates. (cumulative investment as at the end of 2005/
Yet, as long as distribution companies continue planned total investment within 30 years) as at
to establish the distribution network in their the end of 2005. This type of information is
designated region by connecting all potential regarded as crucial by EMRA, as it provides
consumers, access to which is economically and an indication of progress. Meanwhile, it
technically feasible, licensees are considered to reflects licensees’ projections of the
be meeting EMRA’s five-year requirement. In cumulative investment requirements for the
fact, from EMRA’s perspective, the penetration 30-year period of the license. Such
rate is not a criterion for meeting the five-year projections are communicated to EMRA
requirement following the tender and before EMRA’s
21
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
decision to grant the winner its license. Within substantial infrastructure, which facilitates their
this short time span, EMRA examines the goals in rapidly gasifying their respective
winner’s projections and compares them to regions. Table 3.3 highlights the importance of
its commitment to invest in a network whose such asset transfers for gas distribution
capacity will be sufficient for the duration of licensees. For some companies asset transfers
the license. have constituted more than half of the
70
60
50
40
30
20
10
Usak
Konya
Yalova
Corum
Gemlik
Balikesir
Sivas
Konya-Eregli
Corlu
Catalca
Bandirma
Gebze.
Erzurum
Karadeniz-Eregli-Duzce
Source: Distribution companies.
Accordingly, in nine distribution regions, the cumulative investment costs as at the end
licensees have invested more than half of of 2005.
the total amount planned to be invested during
the 30-year license period. In four out Table 3.4 highlights the physical progress of
of these nine regions, the completion investment in infrastructure by distribution
rate for investments is above 70 percent. In five companies. As at this point, the investment
of the remaining regions, the completion rate needed for meeting EMRA’s five-year requirement
has remained below 50 percent. However, these (such as connecting all willing potential
numbers are subject to a downward bias, as consumers) is not clear – partly due to the lack of
they refer to 30-year projections, and the clarity on which potential consumers will be
required investments in the first five years are considered economically and technically not
slightly lower (see Table A4 in Annex I). feasible – the information provided is only
indicative of the ongoing infrastructure
Meanwhile, part of the investment costs have investments. Except in a few distribution regions
been associated with assets transferred from (such as Kayseri, Konya, Balikesir, and Samsun),
BOTAS. Such costs imply that actual greenfield progress measured in terms of km of pipelines
investment has been slightly lower than what appears significantly below older distribution
figures for total investments so far would imply. regions. Besides the starting date, what accounts
However, such costs constitute an integral part for the comparatively larger physical investment
of a licensee’s 30-year investment program and in the older regions is the relatively larger size
are often associated with the transfer of a of their population.
22
REVIEW OF TURKEY’S PROGRESS WITH GREENFIELD GAS DISTRIBUTION PROJECTS SINCE 2003
Source: BOTAS.
23
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
24
REVIEW OF TURKEY’S PROGRESS WITH GREENFIELD GAS DISTRIBUTION PROJECTS SINCE 2003
Source: Dosider. No data are available for several distribution regions where gas consumption by residential consumers has
already commenced. Data on length of steel pipelines include assets transferred from BOTAS.
* Starting data for old distribution regions refer to the date when first residential gas consumption commenced. Following
NGML #4646, these companies were required to obtain new distribution licenses.
25
4. Major Drivers in Turkey’s Recent
Experience with Greenfield Gas
Distribution Projects
Turkey’s recent experience with gas distribution decisions of the distribution companies.
has benefited from a range of factors. There is Thus, companies have been able to
a wide consensus among representatives of customize their investment strategies (such
Turkey’s gas sector that the presence of a well- as those related to the speed of investment,
structured tendering process, under the partnerships, etc.) based on the needs of
guidance and supervision of an independent their respective distribution regions;
regulatory body, has constituted the principal
driver for Turkey’s rapid progress with greenfield • Setting the right connection fee: The
gas distribution projects. Indeed, the process standard connection fee for licensees
has had some major strengths. is US$180 per residential consumer (up to
200 m3). Distribution companies strongly
• Simple and transparent bidding system: appreciate this choice by EMRA, claiming
Only one criterion (the bid for the distribution that a higher fee could have discouraged
margin) has been used to select the winners consumers from switching to gas, while a
at the gas distribution tenders. This has lower fee would have affected their balance
contributed to avoiding any major delays sheets negatively. Based on licensees’
and has left limited room for distorting feasibility studies, for most of them the
the procedures; connection fee appears sufficient to cover
the investment costs in the first phase of their
• Autonomous regulatory body: EMRA has license (first eight years). This US$180
remained largely autonomous of political connection fee may appear relatively low
pressures. This has been particularly true for based on international comparisons; 16
gas distribution tenders; however, Turkey ’s gas distribution
regulations require this fee only to maintain
• Limited interference by EMRA in the right of the potential consumer to be
investment decisions: EMRA determines connected to gas and obtain a meter (the
the requirements for licensees, but it has cost of which stands around US$30).
avoided interfering in the investment Distribution companies are not involved
16
For instance, the average connection costs that gas distributors are allowed to recover in Egypt stands at US$460. However,
this fee includes a range of activities which are not included in the connection fee charged by distribution companies in Turkey.
In Egypt, as in several other places, connection fees include everything from construction of the pipeline which connects the
household to the distribution main network, to installing all internal and external equipment, the meter and the conversion of
existing appliances. “Arab Republic of Egypt: Connecting Residential Households to Natural Gas – An Economic and Financial
Analysis,” The Global Partnership on Output-based Aid, The World Bank, March 2006.
27
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
Figure 4.1 : Share of Industrial and Residential Gas Consumption (%), 2005
100
90
80
70
60
50
40
30
20
10
0
Usak
Konya
Balikesir
Corum
Sivas
Kayseri
Corlu
Gebze
Bandisma
Catalca
Aksaray
Samsun
Erzurum
Source: Dosider.
17
The NGMDCR defines a service box as follows: “Box containing the service regulator-meter set and/or the valve, or the main
valve itself, installed at the end of a service line or a connection line.” It defines service line as follows: “Pipeline and the
relevant equipment including the service box or pressure-reducing and metering station, connecting the distribution network
to the noneligible consumer’s service box or pressure-reducing and metering station.” Connection line is defined as: “Pipeline
and the relevant equipment including the service box or pressure-reducing and metering station, connecting the national
transmission network or a distribution network to an eligible consumer’s service box or pressure-reducing and
metering station.”
28
MAJOR DRIVERS IN TURKEY’S RECENT EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION PROJECTS
gas sold or transited to industrial users. feature of its more recent tenders has been
Transportation fees collected from eligible the larger geographic size of the distribution
consumers will continue to constitute a regions. The tenders for Izmir20 and Thrace
significant part of the licensees’ revenues. appear as major examples. Meanwhile,
Based on a questionnaire (see Annex II) EMRA has recently allowed licensees to
responded to by licensees of 25 gas expand their distribution regions to include
distribution regions, the expected share of new areas which are within their
gas sold or transported to industrial users, province’s boundaries but are not part of
who are eligible consumers, is substantial. their license.21 The result has been some
According to the feasibility studies of these consolidation in Turkey’s gas distribution
licensees, industrial consumers (purchasing business, where several players have
gas from the distribution company or paying acquired a dominant role (Figure 3.7);
for its transportation services) will constitute,
on an average, 48.9 percent of total gas • EMRA’s choice of sequencing gas market
volume sold or transported at the end of reforms: EMRA’s choice regarding gas
the fifth year of operation;18 market reforms was based on a careful
sequencing. Accordingly, gas distribution
• EMRA’s willingness to improve its tenders have preceded other measures
regulations: EMRA has remained open to aimed at liberalizing Turkey’s gas wholesale
revising the legislation related to gas and import business. In fact, distribution
distribution. For example, following tenders have created strong interest in favor
widespread criticism by licensees, it has of a liberalized gas market, and EMRA has
taken some major measures aimed at already taken major steps in this area (contract
securing larger economies of scale for transfer being a major example); and
licensees. Thus, on the one hand, it has twice
revised the number of distribution regions • A role for municipalities in gas
in which a particular company can distribution: The legislation has allowed
participate.19 This has contributed to a municipalities to acquire 10 percent in the
significant level of market consolidation distribution company in their region without
based on three or four large players who requiring a deposit of any capital. Licensees
are in charge of most of the distribution regions are obliged to invite the municipality to
tendered so far. On the other hand, a major become a shareholder.22 This has provided
18
The expected high share of industrial users is partly because most new distribution regions have a relatively small
population (compared to the old distribution regions). As a result, the presence of several industrial users can often account
for the bulk of the gas sold or transported. By contrast, the expected share of commercial and public consumers at the end of
the fifth year of operation in the 25 distribution regions stands at 5.5 percent of total gas sales.
19
The initial regulation allowed a distribution company to hold licenses in only two distribution regions. Subsequently, this
number was raised to five and, further, to eight distribution regions. As most of the remaining distribution regions are
relatively small in terms of potential demand, this regulation has also aimed at ensuring that interest in new tenders does
not subside.
20
For example, the distribution region for Izmir covers 178 counties, districts and villages, whereas initially EMRA had
tendered distribution regions covering a single small city (such as Konya-Eregli).
21
The new regulation requires the licensee to apply to EMRA if it is willing to expand its existing distribution region. EMRA has
the right to announce a new tender for these additional regions. If other companies show no interest or abstain from offering
a bid lower than the existing distribution margin of the applicant company, EMRA revises the license of the latter to include the
additional areas in its distribution region.
22
A municipality is allowed to acquire another 10 percent stake in the distribution company in its region, if it has paid its debts
to Turkey’s Iller Bank and pays for the stake. The value of the additional stake is based on negotiation between the two parties.
Since most municipalities continue to owe substantial debts to Iller Bank, they have not been able to benefit from this clause
and raise their stakes.
29
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
a significant motivation for municipal the field for more than a decade and
governments to facilitate the investment a half. Thus, by 2002, Turkey’s pioneers
activities related to gas distribution in gas distribution had already
in their regions.23 Meanwhile, as municipal connected 2.9 million residential and
governments are not required to make commercial consumers.25 This helped new
any financial contribution for their 10 percent distributors to benefit from multiple
stake, this has alleviated potential delays externalities, such as access to a well-
associated with financial difficulties on the established domestic industry for materials
part of municipalities. and equipment associated with gas
distribution, and access to the expertise of
Other major factors which have contributed
the older distribution companies. For
to Turkey’s recent impressive progress with
example, many of the new distribution
greenfield gas distribution are:
companies have greatly benefited from
• Benefiting from Turkey ’s past transferring managerial skills from older gas
experience with gas distribution: By the distributors, such as Istanbul’s Igdas. Igdas
time EMRA announced its first tenders for itself has established a training center,
gas distribution licenses, Turkey had International Gas Training Technology
already acquired some major experience in Research Center (UGETAM), which has
23
Some minor problems have been reported. Thus, in several cases, municipal governments have exerted pressure on the
distribution companies to obtain materials (mainly for road construction, such as asphalt) from the municipal company.
24
EYH, AKSA/Anadolu and Zorlu each have more than one distribution region license. The “Others” typically represent
single region licensees.
25
Source: Dosider (www.dosider.org).
30
MAJOR DRIVERS IN TURKEY’S RECENT EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION PROJECTS
26
From 2002 to March 2005, UGETAM trained 5,600 people, of which 2,300 were not employees of Igdas.
27
“Natural Gas Projects in Turkey – Recent Developments,” UNECE –16th Session of the Working Party on Gas,
January 24-25, 2006, presentation by Hulya Aktan, Strategy and Business Development Department, BOTAS.
28
For example, Corumgaz, which has achieved the highest gas penetration rate among the new distribution companies, claims
to have reduced air pollution by nearly 50 percent toward the end of 2005.
29
The study on relative fuel prices conducted by Dosider covers only five major cities (Istanbul, Ankara, Izmit, Bursa and
Eskisehir). As distribution companies operating in distribution regions tendered by EMRA charge significantly lower distribution
margins, the final cost of natural gas for the consumer in these regions is generally lower than in the above-mentioned five
cities. As a result, coal’s price advantage in these regions is even smaller.
31
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
0.30
0.25
0.20
YTL/1,000 kcal
0.15
0.10
0.05
0.00
LPG (Aygaz) Electricity Domestic Lignite Gas (Istanbul) Imported
(TEDAS) (Soma) Russian Lignite
Coal (Eskisehir)
Source: Dosider (as on April 14, 2005); Prices include Value-Added Tax (VAT).
1200
1000
800
600
400
200
0
Ireland
Spain
Poland
Hungary
Switzerland
Finland
Turkey
Portugal
France
Slovak Republic
Mexico
United States
New Zealand
Czech Republic
32
MAJOR DRIVERS IN TURKEY’S RECENT EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION PROJECTS
33
5. Primary Constraints on Further
Progress in Turkey’s Greenfield
Gas Distribution Projects
The World Bank ’s interviews with gas • Short time to prepare for the
distribution companies in Turkey have revealed prequalification: Once EMRA announces
that, overall, these companies strongly support a tender, interested parties have been
the existing licensing process undertaken by provided with a relatively short period to
EMRA. While they have emphasized several prepare their prequalification documents
points which could help to facilitate progress (between two and six weeks);
with greenfield gas distribution, only a few of
them have been related to the existing tendering • Presence of multiple bidding rounds: For
system and the regulatory body. In general, they most licensees, this has been another cause
have perceived the regulatory body as their for low winning bids at the tenders. There
major partner in resolving a number of issues. have been cases where the winner was
determined after more than 70 rounds
The following are the areas where distribution (for example, Thrace);
companies have expressed concerns about
EMRA’s regulations and its tendering process. • Varying perceptions of investment
targets: In some key areas related to
• The lack of requirement for a feasibility progress in meeting the investment
study: Many representatives of the requirements, the regulations are subject to
distribution business have considered this a interpretation. As a result, some licensees
potential cause for the involvement of an have prepared their investment plans having
“excessively” large number of bidders at the read the regulations differently from what
tender and the resulting low winning bids. EMRA intended. The regulations may need
The major concern has been that some to be further clarified for licensees to meet
companies which have poor knowledge of these requirements (see below);
the project’s expected returns may become
involved in bidding; • Uncertainty about the distribution
margins after the eighth-year period:
• Relatively easy prequalification for the The profitability of distribution projects
tenders: It is important to prequalify a hinges upon EMRA’s decisions regarding
reasonable number of suitable firms. the price cap after the eighth year of the
Many licensees believe that toughening licensee’s operation. Distributors have
the criteria for prequalification may been concerned about the lack of a clear
help to reduce the number of bidders, methodology for estimating distribution
35
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
margins after the eighth-year period period. Meanwhile, the criteria for the
ends (see below); and prequalification stage have remained relatively
easy for applicants to meet, but EMRA appears
• The need for standardization in gas to have made these requirements stricter, as
distribution: EMRA’s regulations require evidenced by the increased number of
companies to abide by Turkey’s standards disqualified applicants in 2005.
for infrastructure development, household
internal installations, and metering (set by Constraints on Expanding the
the TSI). Many insiders believe that the Licensee’s Consumer Base
existing standards are not applied strictly,
which may result in problems related to Distribution companies have referred to a
the quality and safety of distribution projects. number of challenges in their experience with
Meanwhile, progress in standardization gas distribution in the past two to three years.
is believed to facilitate the supervisory Many of these challenges could be instructive
functions of EMRA. for what may cause delay in a greenfield gas
distribution project.
While concerns about these issues have been
shared widely within the gas distribution • Cultural preference among households
industry in Turkey, some of them have appeared in favor of individual heating systems:
to be relatively inconsequential in practice. Households in Turkey predominantly prefer
For instance, the lack of a requirement for individual heating systems, both before and
conducting a feasibility study may have after switching to natural gas. Only a very
contributed to “too many” bidders participating small percentage of households relies on
in the tenders. However, all interviewed gas central heating. 30 Households hope to
distributors (representing 26 distribution benefit in the long run by opting for
regions) have noted that they did carry individual heating, as it provides a
out a feasibility study prior to the tender. better control over gas bills; however, this
Evidently, those that have abstained from has two-fold implications. First, it has raised
conducting a feasibility study have not won the overall investment costs of distribution
a distribution tender. companies. Naturally, they prefer central
heating systems, as they collect connection
Another example is related to the length of the fees for each household, and the connection
preparation period for the tenders. Many gas costs are considerably lower for buildings
distributors have noted that preparing for a with such systems. Second, internal heating
tender started long before EMRA’s tender appliances constitute the largest cost
announcement (sometimes as long as one to component for households, yet the actual
two years before the announcement). As a cost depends primarily on whether they
result, not all bidders have been practically rely on individual or central heaters.
constrained by the officially short preparation The appliance cost per household with
30
Dosider reports that, as in August 2005, Turkey’s total gas subscribers were 4,774,937, of which 3,245,791 used individual
heating systems. Within this total, there were only 42,421 buildings with central heating, which was equal to 691,774
individual subscribers. As most of the buildings with central heating are located in Turkey’s largest cities, many of the new
distribution companies (operating in Turkey’s remaining smaller cities) have to rely predominantly on consumers preferring
individual heating systems. Meanwhile, according to data from the State Statistics Institute, there were 12.5 million dwellings
in Turkey in 2000, 16 percent of which used central heating systems (Source: “Arastirma Dosyasi – Sehirlerde Dogal Gaz
Kullaniminin Guncel Durumu,” Dogal Gaz Dergisi, October 2005; www.dogalgaz.com.tr).
36
PRIMARY CONSTRAINTS ON FURTHER PROGRESS IN TURKEY’S GREENFIELD GAS DISTRIBUTION PROJECTS
central heaters is estimated to be nearly a covered in the current legislation.33 Finally, the
fraction of the cost of individual heaters.31 lack of standardization regarding the
This cost is a major hindrance for most contracts between distribution companies and
households to shift to natural gas. In this firms installing internal installations leads to
respect, distribution companies have been additional delays because of quality and
often at odds with companies marketing safety problems;34
internal appliances, which have widely
advertised the convenience of individual • Relaxed environmental requirements:
heating systems; At the beginning of 2005, Turkey’s Ministry
of Environment and Forestry issued a
• Issues related to companies in charge regulation (#25699, Article 20) which
of internal installations: Distribution required households, businesses and
companies, as required by law, are not industrial consumers to use natural
directly involved in installing the internal gas for their heating purposes, if there is
infrastructure of households and access to gas in their location. This
commercial consumers. Instead, this is regulation was subsequently revised
performed by specialized companies which and softened (Regulation #25758) and,
need to be approved by the distribution as a result, these users are promoted,
companies. Several issues have surfaced but not required to consume natural
regarding such companies. First, in many gas and renewables. However, several
regions, their number has been too small municipalities have adopted a tougher
to meet existing requests for gas attitude toward consumption of less
connections, leading to delays and environment-friendly fuels;
disillusionment among subscribers.32 In most
cases, subscribers have blamed their • Subsidized coal for low-income families:
distribution company for not being aware In many cities, local governments have
of the source of the problem. Second, provided subsidized coal to low-income
distribution companies have been accorded families. Given the competitive pricing for
limited advantage against companies in coal, this has weakened their incentive to
charge of internal gas infrastructure. switch to natural gas. Distribution
If quality or safety issues arise, the gas companies have called for government
distributor may decline to approve the subsidies directed at covering the
installation, but this often results in additional installation and equipment costs of low-
expenses for the distribution company, as costs income households; however, no progress
related to the approval process are not fully has been achieved;
31
One licensee estimates that the cost for individual heating systems (with combined functions for space heating, water
heating and cooking) stands between 2,000 and 3,500 YTL (US$1,503-2,631). The cost of a central heating system (serving the
same purpose) per subscriber depends on the number of units in a building. Such costs usually range from 500 to 1,000
YTL (US$376-752).
32
For example, Aksa has reported that in some of its distribution regions, subscribers have been required to wait three to four
months to switch to gas due to the lack of a sufficient number of installation companies.
33
Companies in charge of installing internal equipment and piping are required to pay certain fees to the licensee for the
approvals and tests related to their projects. According to EMRA’s Decision #617, currently such fees stand at 12.5 YTL
(= US$9.4) for households (using the typical G4-type household gas meters). Fees for larger consumers are slightly higher. If
such companies fail to get approval at the first round, they are liable to pay half of the charge in the second approval round.
In the third round, they pay 25 percent of the original approval fee. After the third round, there is no charge.
34
There is no single standard contract between distribution companies and companies in charge of installing internal
installations. There have been proposals to adopt Igdas’ installation contract as a framework for a standard contract.
37
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
• Households’ conservative approach the coming years. Some minor problems, such
toward gas: In most distribution regions, as the requirement for licensees to provide a
households have been worried about the payment guarantee on their gas purchases
safety of switching to gas. Some distribution from BOTAS, have been resolved through
companies and Dosider, the association for EMRA’s mediation.35
gas appliances, have been involved in
educating consumers about the safety and The major issue between the national pipeline
benefits of natural gas; operator and the distribution licensees is the
transfer of assets.36 The legislation requires that
• Issues related to city planning and distribution companies pay for the existing
mapping: In a number of cities, distribution assets belonging to BOTAS in their designated
companies have complained about excessive regions.37 BOTAS determines the value of these
costs resulting from infrastructure-related assets and specifies it in the distribution license.
problems, such as the lack of sufficiently Problems in transferring such assets have arisen
wide roads. Occasionally, because of the when BOTAS is involved in an ongoing
lack of detailed maps for underground investment activity related to the asset. As a
infrastructure, they have had to delay their result, BOTAS and gas distribution licensees are
investments and prepare their own studies; often drawn into disputes about revising the
value of the particular asset. Distribution
• Problems in the procurement of companies have often associated delays
infrastructure materials: As over a dozen in their investment programs with asset
greenfield gas distribution projects have transfer problems.
commenced simultaneously, some companies
have experienced delays in procuring the Distributors also cite BOTAS’ inability to provide
necessary equipment and materials for their discounts to some of its consumers, namely
infrastructure purposes; and those in the so-called organized industrial
zones. Because of this, distribution companies
• Lack of funding for public buildings: have had repeated complaints from consumers
Gas distributors can benefit greatly from within organized industrial zones who do not
connecting some major public entities, benefit from this discount because they are
but limited progress has been achieved in located within a certain gas distribution region.
gas connections due to the latter ’s
financial constraints. This problem was partially resolved at the
beginning of 2006. Accordingly, an EMRA
Difficulties Related to BOTAS decision (#616) required BOTAS to secure gas
for all of its consumers at the same rate.
Overall, gas distributors’ relations with BOTAS However, there are two reasons for continued
have been devoid of any serious problems. For price differences across various consumers in
instance, all interviewed licensees have praised Turkey: first, the difference in distribution
BOTAS for completing the required transmission margins across distribution regions causes
network and securing an adequate capacity for some consumers to benefit from overall lower
35
EMRA agreed to become directly involved in cases of problems associated with licensee nonpayment to BOTAS.
36
In some distribution regions, BOTAS has owned distribution networks and a certain number of noneligible consumers.
Following a tender for that particular region, BOTAS is required to transfer these assets (and the consumers as well).
37
In general, distribution companies have not had objections related to the presence of BOTAS assets. Usually, the size of the
assets subject to transfer is associated with the presence of large consumers in the designated distribution region.
38
PRIMARY CONSTRAINTS ON FURTHER PROGRESS IN TURKEY’S GREENFIELD GAS DISTRIBUTION PROJECTS
gas tariffs; and, second, consumers served necessary for meeting transmission capacity
directly from BOTAS’ transmission grid are able requirements in a growing number of gasified
to avoid transportation charges paid by similar regions in Turkey. This concern appears to be
consumers located within distribution regions. valid for the long run when growing
As a result, eligible consumers appear to be at consumption may call for expanding part of the
a disadvantage by being located within regions transmission network. Meanwhile, both in the
designated for distribution companies. short and long run, issues such as balancing
demand and supply for a growing number of
Finally, the massive spread of gasification participants in Turkey’s gas sector will need to
projects in Turkey may require commensurate be addressed, and BOTAS will need to play an
adjustments within BOTAS. Due to the growing important role in these efforts because of its
number of gasified cities, BOTAS’ tasks will major role in wholesale and transmission
expand significantly. A particular focus will be network control.
39
6. Major Challenges Ahead
Securing and Measuring Progress companies do not plan to install service lines
and service boxes throughout the settlement
One of the major responsibilities of a regulatory zone in their distribution regions;
body lies in ensuring that distribution
companies meet license requirements. Success • Definition of a “technically and
in this area requires elaborate supervision of economically feasible” connection:
licensee activities. Such supervision will benefit Licensees are required to connect all
highly from efforts aimed at resolving problems potential consumers if the requested
associated with potential sources of vagueness connection is economically and technically
in the investment requirements set for licensees. feasible. The current legislation does
The World Bank ’s interviews with gas not determine an objective test of
distribution companies have revealed that feasibility. This is partly because ex ante
licensees have different interpretations about a determination regarding technical and
number of issues central to the investment economic feasibility is hardly possible.
requirements. Major areas where definitional EMRA’s evaluation is envisaged to be
problems have remained on the ground are made after a dispute arises on an ad hoc
described as follows: basis. However, as a result of this lack
of an objective test for feasibility, licensees
• Requirements in the first five-year have different assumptions about the
period: According to EMRA, the tender potential consumers that fall into the
document requires distribution companies category of being “technically and
to complete the whole distribution economically feasible.” Thus far, EMRA
network in the settlement zone of their reports that no potential consumers
distribution region. This includes the steel have had complaints about not being
and polyethylene (PE) network, as well as connected because they were located in
the service lines and service boxes needed an area deemed unfeasible by the
for connecting consumers. Some companies licensee. However, this is partly due
perceive that this requirement encompasses to licensees’ initial focus on areas with
completing the main steel and PE network higher population density, as well as
only. Their investment plans envision higher income;
investment in service lines and service boxes
based on consumer demand. This will • Definition of “settlement zone:”
involve making such investments throughout Licensees are required to connect all
the 30-year period determined in their potential consumers in their settlement zones
licenses. As a result, some distribution (imarli alan). Settlement zones are areas
41
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
38
This implies that commercial consumers are expected to pay the usual US$180 for the first 200 m2, and an additional US$150
for each 100 m2 thereafter.
42
MAJOR CHALLENGES AHEAD
provide the regulator valuable grounds details listed in their licenses. As a result, the
to assess the progress in the greenfield gas authorized entity is required to prepare
distribution projects it supervises, and reports which outline how the license terms
provides it with the opportunity to are implemented; and
communicate its concerns to licensees
during their investment process; • Financial supervision of licensees:
Financial supervision of distribution
• Supervision of compliance with companies is essential not only for their
required standards: Upon EMRA’s compliance with accounting standards but
request, licensees need to submit certificates also for assessing the actual progress of
obtained from TSI which verifies that the licensees’ investment programs. The
equipment and material used in the legislation requires licensees to be audited
infrastructure complies with the relevant by independent companies (authorized by
legislation and standards. However, EMRA) who need to submit annual reports
compliance with required standards is to the regulator. Besides the annual audit
further supervised through EMRA-certified reports prepared based on accepted
companies whose representatives are standards in Turkey, the auditing companies
authorized to observe the process of network are required to submit additional data
construction in the distribution regions. Gas (capital structure, annual sales, insurance
distribution licensees are required to pay for coverage, license holder income, etc.) on
such companies’ expenses; the gas distribution licensees.
43
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
terms, as this may lead to legal proceedings The lack of uniform accounting requirements
between EMRA and the old licensee. As a result, for distribution companies may lead to problems
EMRA’s attempts to establish a complex at a later stage. Licensees have been allowed
monitoring system of the distribution to choose between two different accounting
companies constitute a valuable initiative which reporting models, one based on the capital
can help to minimize such problems. markets board and the other prepared on
principles adopted by the Ministry of Finance.
Tariff Regulation after the Eight-year As various distribution companies have opted
Period of Fixed Distribution Margins for one of the two reporting models, this is likely
to cause difficulties in comparing licensee
The legislation requires the distribution income and expenditures.
companies to operate at fixed distribution
margins for the first eight years of the project. The methodology for determining the price
The margins for the remainder of the period cap in the second phase is not totally clear,
clearly appear to be of the utmost importance leading to uncertainty among licensees.
in determining the profitability of a greenfield Ideally, having a clear methodology from the
distribution project. start of the tendering process would help
determine financial reporting requirements
The regulatory body has announced that after specific to assessing licensee regulatory asset
the eighth year, the distribution margin will be bases. In addition to standard audit
set in accordance with the price cap method. reports, the current reporting by auditing
However, the methodology for applying the price companies, requested by EMRA, appears to
cap is not clear at this stage, and there is work in be beneficial for determining unforeseen
progress to determine the types of expenditures changes in licensees’ cash flows and
which will be included in the licensees’ asset base. governance structure.
EMRA believes that the details of the new model
Uncertainty about the tariff after the eighth year
determining the tariffs will get clearer as multiple
of operation has led to different expectations
licensees achieve significant project completion
among licensees. With the tenders conducted
rates. This will provide the regulatory body with
in 2005, it has become clear that the profitability
the ability to compare investment and operation
of some of the distribution projects will depend
costs in various distribution regions. As a result,
solely on the distribution margin in the second
EMRA hopes to prepare the requested
phase (that is, after the eighth year). Without a
methodology and determine the price cap for
considerably higher margin, projects may not
each of the designated regions.
be profitable well into the second phase for
companies who have accepted “0”
To prepare the price cap methodology, EMRA distribution margins and agreed to
collects detailed information on each of the significantly reduce the connection fees for
companies through the various monitoring
households. As many of these companies rely
mechanisms examined earlier. Among these, on bank loans, future margins will have debt-
the mechanism for financial supervision of the servicing implications.
licensees is of utmost importance. However,
EMRA may need to improve this mechanism to In principle, the connection fees should cover
fully benefit from it when establishing the all or most of the investment costs for the first
methodology for determining the regulatory eight years of the project, while distribution
asset base and the posteighth-year period margins (and transportation fees) should cover
distribution margin. the operational costs. Investment costs are
44
MAJOR CHALLENGES AHEAD
expected to be quite marginal in the second about the distribution margin in the second
phase of the project, when the distributor will phase have also varied. Quite commonly,
undertake fewer new connections. Thus, licensees oppose the idea of applying a certain
operational costs will constitute the bulk of the percentage increase in the distribution margin.
costs in the second phase. According to a the Instead, they prefer to focus on a certain range
World Bank questionnaire responded to by 18 for these margins, below which they may not
licensees, the annual average for 30 years be willing or able to operate their distribution
ranges between US$4.5 and US$20 per licenses. Based on interviews with gas
subscription unit. The average for the 18 distributors, the expected margin in the price
licensees stands at US$12.7. The new cap period has varied from 1 cent to 2.5 cents
distribution margin should be able to cover per m3. While some companies have claimed
these operational costs, as well as secure some that 1 cent/m3 will be sufficient for the overall
rate of return determined by the distribution profitability of the project, a more common
company. Most distribution companies expectation is that the distribution margin
interviewed by the World Bank have been should be between 2 cents and 2.5 cents per
guided by this principle when estimating the m3. A widely stated claim is that this is the current
profitability of their projects. margin determined by EMRA for two of the
privatized gas distributors (Bursa and Eskisehir),
Based on licensees’ feasibility studies, most gas and, therefore, they expect similar margins in
distributors expect to have positive cash flows their second phase.
between the fifth and eighth years of operation.
However, since 2005, a growing number of Although the regulatory framework for the
companies have been willing to operate under posteight-year period is not clear, most
distribution margins which will be insufficient distribution companies have faith in the
for securing positive cash flows until the second regulatory framework, and are of the view that
phase. These licensees have viewed their margins in the second phase will be reasonable
projects as a means to secure themselves the and will enable recovery of current as well as
right to be the sole gas distributor in a past costs. A common justification among them
designated region for 30 years and possibly is that, as a rule of thumb, the additional cost
longer. They have viewed the tenders as a kind (for consumers) of increasing the distribution
of a “concession” which has a certain cash margin by 1 cent/m3 is considerably small.
value. To acquire this “concession,” they have Based on an assumption that the average
been willing to accept very low distribution annual consumption per household will be
margins in the first phase of operation (the first 1,500 m3, this implies US$15 additional costs
eight years) and occasionally reduce the for the consumers.
connection fees for their consumers.39 For
such companies, the overall profitability of the Meanwhile, EMRA recently reduced the
project is much more sensitive to EMRA’s distribution margins for five of Turkey’s older
decision about the distribution margin in the gas distributors. As in 2006, EMRA decided to
second phase. lower their distribution margins by nearly five
percent. EMRA’s move is partly explained by the
As in the case of the considerable discrepancy growing discrepancy between the distribution
in the winning bids, licensees’ assumptions margins in the old and new distribution regions.
39
One licensee (in charge of the Denizli gas distribution region), which has submitted a “0” winning bid and agreed to slightly
reduce its connection fees, claims that the connection fees will be sufficient to cover the investment costs.
45
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
In addition, the reduction has aimed to network and its associated consumer base.
promote improvements in efficiency in In this regard, two issues, safety and consumer
operating the old distribution networks. satisfaction, will become increasingly important.
Another major question is about the future of Companies will need to possess adequate
transportation fees collected by distribution capacity to respond to safety-related issues. The
companies. Currently, licensees in Turkey’s new safety of their networks will largely hinge upon
distribution regions are allowed to charge the quality of the investment materials they use
transportation fees in an amount up to their today. EMRA has charged a number of
distribution margins. This secures the licensees companies with the specific responsibility of
significant revenues, particularly from large examining the quality of the ongoing
consumers, such as eligible consumers and investments. Distribution companies are
power plants that purchase gas from BOTAS required to disclose all necessary information
(and other wholesalers in the future). to such companies, as well as fund their
The transportation fees appear fixed for the first expenses. As a result, this promising
eight years, as they are the equivalent of the mechanism may enhance the safety of the
distribution margin. However, it is not clear at distribution infrastructure in the future.
this point whether EMRA will revise this policy in
the second phase. In case a revision of this Consumer satisfaction is another area where
rule results in a relative reduction in the licensees will have to channel a larger share
transportation margins (compared to a of their resources. This will particularly be the
licensee’s new distribution margins), licensees case when wholesale competition begins and
are expected to demand even larger increases the threshold for “eligible” consumers is
in their distribution margins as a means reduced. However, to ensure quality of
of compensation. service, distribution companies will need to
be prepared for a differentiation in
Transformation in the Distribution transportation fees and distribution margins,
Companies’ Main Activity as at some point they may emerge as service
providers (rather than gas sellers) for most
As distribution companies are required to gasify of their current consumers.
the entire region designated in their license
within five years, most of their investments will Upfront Capital Costs for Co7nsumers
be completed in that period. After a point,
investment in infrastructure will remain a Estimates of upfront costs for consumers are
secondary activity for the licensees, as their primarily the costs related to installing heating
priorities will shift toward operating systems, piping and related infrastructure.
their networks. These costs vary significantly, depending on
whether it is a central heating system or an
In this new phase of their licenses, distribution individual one. Quick estimates based on
companies will need to prepare for various discussions with some licensees and some
challenges. One of them is related to revenues industry associations suggest that the cost for
from connection fees, which will be minimal, individual heating systems (with combined
and licensees will need to rely mainly on functions for space heating, water heating, and
distribution margins (and transportation fees). cooking) could vary between 2,000 and 3,500
Another challenge for distribution companies YTL (US$1,500-2,630). The cost of a central
is that they will need access to expertise and heating system (serving the same purpose) per
new types of skills for managing the existing subscriber depends on the number of units
46
MAJOR CHALLENGES AHEAD
in a building. Such costs are typically found (operating in Turkey’s remaining smaller cities)
to be lower, and usually range from 500 to may have to rely predominantly on individual
1,000 YTL (US$376-752). In August 2005, heating systems. The challenge, therefore, will
only 42,421 buildings in Turkey had central be to convince consumers of the long-term
heating, which is equal to 691,774 individual benefits of the upfront costs. In some cases,
subscribers. As most of the buildings with licensees may be required to provide financing
central heating are located in the larger cities, to consumers, to enable them to bear the
many of the new distribution companies upfront costs.
47
Annex I
Table A1: Participation in Gas Distribution Tenders and Their Results
Regions Winner Winning Starting Date Winning Bid Connection Number of Number of Number of Bid Bond Performance
Date of License (cents/kWh) Fee (US$) Bidders at Applicants for Prequalified (US$) Bond (US$)
Tender Prequalification Firms
2003 0.0926
49
50
Regions Winner Winning Starting Date Winning Bid Connection Number of Number of Number of Bid Bond Performance
Date of License (cents/kWh) Fee (US$) Bidders at Applicants for Prequalified (US$) Bond (US$)
Tender Prequalification Firms
2004 0.115
2005 0.052
51
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
Table A2: Progress in Gas Penetration in New Distribution Regions as at the End of 2005
Source: EMRA.
* The number of subscribers is based on EMRA’s definition of residential equivalent subscription: one unit of residential
equivalent subscription refers to households or commercial and public services with a size of up to 200 m2. For spaces above
200 m2, each additional 100 m2 refers to an additional unit of residential equivalent subscription.
** Distribution companies provide the potential number of subscribers, and, as a result, penetration ratios are subject to the
bias of licensees’ estimates.
52
ANNEX I: STATISTICAL ANNEX
Table A3: Transportation Fees Charged in Old and New Distribution Regions
Old Regions
Adapazari 0.111
Ankara 0.068
Bahcesehir 0.068
Bursa 0.068
Eskisehir 0.068
Istanbul 0.068
Izmit 0.068
Denizli 0
Edirne-Kirklareli-Tekirdag 0
G.Antep-Kilis 0
Canakkale 0.001
K. Maras 0.009
Izmir 0.012
Isparta-Burdur 0.015
Bilecik-Bolu 0.016
Manisa 0.016
Yalova 0.031
Corlu 0.036
Malatya 0.037
Catalca 0.044
Erzurum 0.046
53
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
Gebze. 0.052
Samsun 0.055
Usak 0.055
Inegol 0.061
Konya 0.064
Karabuk-Kastamonu-Cankiri 0.069
Kayseri 0.076
Corum 0.079
Sanliurfa 0.095
Nigde-Nevsehir 0.098
Balikesir 0.112
Kutahya 0.124
Kirikkale-Kirsehir 0.158
Sivas 0.164
Konya-Eregli 0.172
Bandirma 0.174
Yozgat 0.176
Polatli 0.23
Aksaray 0.236
Gemlik-Umurbey 0.239
Source: EMRA.
54
ANNEX I: STATISTICAL ANNEX
Kayseri 26.7 NA NA
Inegol 5.0 NA NA
Kutahya 12.0 NA NA
Samsun 20.9 NA NA
Aksaray 5.7 0
Kirikkale-Kirsehir 11.2 NA NA
Usak 4.7 24 .5
Total 208.3 NA NA
* Cumulative investments include payments for assets transferred by BOTAS. Such payments are required in several regions
with BOTAS assets, and are part of the 30-year investment plan. Data for companies with information available only for
cumulative investments has been obtained from EMRA.
55
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
Table A5: The Share of Industrial Consumption in Licensees’ Distribution Regions in 2005*
Inegol 4,048,680 NA NA
Kutahya NA NA NA
Konya-Eregli NA NA NA
Karadeniz-Eregli-Duzce NA NA NA
Kirikkale-Kirsehir NA NA NA
Gemlik NA 15,784,005 NA
Yalova NA NA NA
Source: Dosider.
56
ANNEX I: STATISTICAL ANNEX
Table A6: Ranking of Relative Prices for Selected Fuels Consumed by Households
Type of Fuel Minimum Heat Unit Cost YTL/m3 Assumed Cost per
(Location) Value or YTL/kg or Efficiency 1,000 kcal
YTL/kWh
Imported Siberian Lignite Coal (Istanbul) 6,000 kcal/kg 0.244 60% 0.068
Imported South African Coal (Ankara) 6,500 kcal/kg 0.260 65% 0.062
Imported Russian Lignite Coal (Eskisehir) 6,200 kcal/kg 0.255 65% 0.063
Source: Dosider (as on April 14, 2005); Prices include Value-Added Tax (VAT).
Table A7: End user Average Gas Prices in Industry and Households in 2005 –
International Comparisons
57
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
58
Annex II
Questionnaire for Gas
Distribution Companies
Data on the following: • For companies that have not fulfilled their
18-month requirements:
• Number of households connected; and
• Reasons:
• Specifics about households connected:
– What has been EMRA’s response? What
– Density; type of warnings?
59
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
• How will the company finance investments • What are the assets that need to be
after Year 8? transferred?
60
List of Formal Reports
Region/Country Activity/Report Title Date Number
Africa Regional Anglophone Africa Household Energy Workshop (English) 07/88 085/88
Regional Power Seminar on Reducing Electric Power System
Losses in Africa (English) 08/88 087/88
Institutional Evaluation of EGL (English) 02/89 098/89
Biomass Mapping Regional Workshops (English) 05/89 --
Francophone Household Energy Workshop (French) 08/89 --
Interafrican Electrical Engineering College: Proposals for Short-
and Long-Term Development (English) 03/90 112/90
Biomass Assessment and Mapping (English) 03/90 --
Symposium on Power Sector Reform and Efficiency Improvement
in Sub-Saharan Africa (English) 06/96 182/96
Commercialization of Marginal Gas Fields (English) 12/97 201/97
Commercializing Natural Gas: Lessons from the Seminar in
Nairobi for Sub-Saharan Africa and Beyond 01/00 225/00
Africa Gas Initiative — Main Report: Volume I 02/01 240/01
First World Bank Workshop on the Petroleum Products
Sector in Sub-Saharan Africa 09/01 245/01
Ministerial Workshop on Women in Energy 10/01 250/01
and Poverty Reduction: Proceedings from a Multi-Sector 03/03 266/03
and Multi-Stakeholder Workshop Addis Ababa, Ethiopia,
October 23-25, 2002
Opportunities for Power Trade in the Nile Basin: Final Scoping Study 01/04 277/04
Energies modernes et réduction de la pauvreté: Un atelier
multi-sectoriel. Actes de l'atelier régional. Dakar, Sénégal,
du 4 au 6 février 2003 (French Only) 01/04 278/04
Énergies modernes et réduction de la pauvreté: Un atelier
multi-sectoriel. Actes de l'atelier régional. Douala, Cameroun 09/04 286/04
du 16-18 juillet 2003. (French Only)
Energy and Poverty Reduction: Proceedings from the Global Village
Energy Partnership (GVEP) Workshops held in Africa 01/05 298/05
Power Sector Reform in Africa: Assessing the Impact on Poor People 08/05 306/05
The Vulnerability of African Countries to Oil Price Shocks: Major 08/05 308/05
Factors and Policy Options. The Case of Oil Importing Countries
Angola Energy Assessment (English and Portuguese) 05/89 4708-ANG
Power Rehabilitation and Technical Assistance (English) 10/91 142/91
Africa Gas Initiative - Angola: Volume II 02/01 240/01
61
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
62
LIST OF FORMAL REPORTS
63
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
64
LIST OF FORMAL REPORTS
Asia Regional Pacific Household and Rural Energy Seminar (English) 11/90 --
China County-Level Rural Energy Assessments (English) 05/89 101/89
Fuelwood Forestry Preinvestment Study (English) 12/89 105/89
Strategic Options for Power Sector Reform in China (English) 07/93 156/93
Energy Efficiency and Pollution Control in Township and
Village Enterprises (TVE) Industry (English) 11/94 168/94
Energy for Rural Development in China: An Assessment Based
on a Joint Chinese/ESMAP Study in Six Counties (English) 06/96 183/96
Improving the Technical Efficiency of Decentralized Power
Companies 09/99 222/99
65
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
Air Pollution and Acid Rain Control: The Case of Shijiazhuang City 10/03 267/03
and the Changsha Triangle Area
Toward a Sustainable Coal Sector In China 07/04 287/04
Demand Side Management in a Restructured Industry: How
Regulation and Policy Can Deliver Demand-Side Management
Benefits to a Growing Economy and a Changing Power System 12/05 314/05
Fiji Energy Assessment (English) 06/83 4462-FIJ
Indonesia Energy Assessment (English) 11/81 3543-IND
Status Report (English) 09/84 022/84
Power Generation Efficiency Study (English) 02/86 050/86
Energy Efficiency in the Brick, Tile and
Lime Industries (English) 04/87 067/87
Diesel Generating Plant Efficiency Study (English) 12/88 095/88
Urban Household Energy Strategy Study (English) 02/90 107/90
Biomass Gasifier Preinvestment Study Vols. I & II (English) 12/90 124/90
Prospects for Biomass Power Generation with Emphasis on
Palm Oil, Sugar, Rubberwood and Plywood Residues (English) 11/94 167/94
Lao PDR Urban Electricity Demand Assessment Study (English) 03/93 154/93
Institutional Development for Off-Grid Electrification 06/99 215/99
Malaysia Sabah Power System Efficiency Study (English) 03/87 068/87
Gas Utilization Study (English) 09/91 9645-MA
Mongolia Energy Efficiency in the Electricity and District
Heating Sectors 10/01 247/01
Improved Space Heating Stoves for Ulaanbaatar 03/02 254/02
Impact of Improved Stoves on Indoor Air Quality in
Ulaanbaatar, Mongolia 11/05 313/05
Myanmar Energy Assessment (English) 06/85 5416-BA
Papua New
Guinea Energy Assessment (English) 06/82 3882-PNG
Papua New
Guinea Status Report (English) 07/83 006/83
Institutional Review in the Energy Sector (English) 10/84 023/84
Power Tariff Study (English) 10/84 024/84
Philippines Commercial Potential for Power Production from
Agricultural Residues (English) 12/93 157/93
Energy Conservation Study (English) 08/94 --
Strengthening the Non-Conventional and Rural Energy
Development Program in the Philippines:
A Policy Framework and Action Plan 08/01 243/01
Rural Electrification and Development in the Philippines:
Measuring the Social and Economic Benefits 05/02 255/02
Solomon Islands Energy Assessment (English) 06/83 4404-SOL
Energy Assessment (English) 01/92 979-SOL
South Pacific Petroleum Transport in the South Pacific (English) 05/86 --
Thailand Energy Assessment (English) 09/85 5793-TH
Rural Energy Issues and Options (English) 09/85 044/85
Accelerated Dissemination of Improved Stoves and
Charcoal Kilns (English) 09/87 079/87
Northeast Region Village Forestry and Woodfuels
Preinvestment Study (English) 02/88 083/88
Impact of Lower Oil Prices (English) 08/88 --
66
LIST OF FORMAL REPORTS
67
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
Armenia Development of Heat Strategies for Urban Areas of Low-income 04/04 282/04
Transition Economies. Urban Heating Strategy for the Republic
Of Armenia. Including a Summary of a Heating Strategy for the
Kyrgyz Republic
Bulgaria Natural Gas Policies and Issues (English) 10/96 188/96
Energy Environment Review 10/02 260/02
Central Asia and
The Caucasus Cleaner Transport Fuels in Central Asia and the Caucasus 08/01 242/01
Central and
Eastern Europe Power Sector Reform in Selected Countries 07/97 196/97
Increasing the Efficiency of Heating Systems in Central and
Eastern Europe and the Former Soviet Union (English and Russian) 08/00 234/00
The Future of Natural Gas in Eastern Europe (English) 08/92 149/92
Kazakhstan Natural Gas Investment Study, Volumes 1, 2 & 3 12/97 199/97
Kazakhstan &
Kyrgyzstan Opportunities for Renewable Energy Development 11/97 16855-KAZ
Poland Energy Sector Restructuring Program Vols. I-V (English) 01/93 153/93
Natural Gas Upstream Policy (English and Polish) 08/98 206/98
Energy Sector Restructuring Program: Establishing the Energy
Regulation Authority 10/98 208/98
68
LIST OF FORMAL REPORTS
Turkey Turkey’s Experience with Greenfield Gas Distribution since 2003 05/07 325/07
Arab Republic
of Egypt Energy Assessment (English) 10/96 189/96
Energy Assessment (English and French) 03/84 4157-MOR
Status Report (English and French) 01/86 048/86
Morocco Energy Sector Institutional Development Study (English and French) 07/95 173/95
Natural Gas Pricing Study (French) 10/98 209/98
Gas Development Plan Phase II (French) 02/99 210/99
Syria Energy Assessment (English) 05/86 5822-SYR
Electric Power Efficiency Study (English) 09/88 089/88
Energy Efficiency Improvement in the Cement Sector (English) 04/89 099/89
Energy Efficiency Improvement in the Fertilizer Sector (English) 06/90 115/90
Tunisia Fuel Substitution (English and French) 03/90 --
Power Efficiency Study (English and French) 02/92 136/91
Energy Management Strategy in the Residential and
Tertiary Sectors (English) 04/92 146/92
Renewable Energy Strategy Study, Volume I (French) 11/96 190A/96
Renewable Energy Strategy Study, Volume II (French) 11/96 190B/96
Rural Electrification in Tunisia: National Commitment,
Efficient Implementation and Sound Finances 08/05 307/05
Yemen Energy Assessment (English) 12/84 4892-YAR
Energy Investment Priorities (English) 02/87 6376-YAR
Household Energy Strategy Study Phase I (English) 03/91 126/91
Household Energy Supply and Use in Yemen. Volume I:
Main Report and Volume II: Annexes 12/05 315/05
69
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
Power Sector Reform and the Rural Poor in Central America 12/04 297/04
Estudio Comparativo Sobre la Distribución de la Renta Petrolera
en Bolivia, Colombia, Ecuador y Perú 08/05 304/05
OECS Energy Sector Reform and Renewable Energy/Energy 02/06 317/06
Efficiency Options
The Landfill Gas-to-Energy Initiative for Latin America
and the Caribbean 02/06 318/06
Bolivia Energy Assessment (English) 04/83 4213-BO
National Energy Plan (English) 12/87 --
La Paz Private Power Technical Assistance (English) 11/90 111/90
Pre-feasibility Evaluation Rural Electrification and Demand
Assessment (English and Spanish) 04/91 129/91
National Energy Plan (Spanish) 08/91 131/91
Private Power Generation and Transmission (English) 01/92 137/91
Natural Gas Distribution: Economics and Regulation (English) 03/92 125/92
Natural Gas Sector Policies and Issues (English and Spanish) 12/93 164/93
Household Rural Energy Strategy (English and Spanish) 01/94 162/94
Preparation of Capitalization of the Hydrocarbon Sector 12/96 191/96
Introducing Competition into the Electricity Supply Industry in
Developing Countries: Lessons from Bolivia 08/00 233/00
Final Report on Operational Activities Rural Energy and Energy
Efficiency 08/00 235/00
Oil Industry Training for Indigenous People: The Bolivian
Experience (English and Spanish) 09/01 244/01
Capacitación de Pueblos Indígenas en la Actividad Petrolera. Fase II 07/04 290/04
Boliva-Brazil Best Practices in Mainstreaming Environmental & Social Safeguards
Into Gas Pipeline Projects 07/06 322/06
Estudio Sobre Aplicaciones en Pequeña Escala de Gas Natural 07/04 291/04
Brazil Energy Efficiency & Conservation: Strategic Partnership for
Energy Efficiency in Brazil (English) 01/95 170/95
Hydro and Thermal Power Sector Study 09/97 197/97
Rural Electrification with Renewable Energy Systems in the
Northeast: A Preinvestment Study 07/00 232/00
Reducing Energy Costs in Municipal Water Supply Operations 07/03 265/03
"Learning-while-doing" Energy M&T on the Brazilian Frontlines
Chile Energy Sector Review (English) 08/88 7129-CH
Colombia Energy Strategy Paper (English) 12/86 --
Power Sector Restructuring (English) 11/94 169/94
Energy Efficiency Report for the Commercial
and Public Sector (English) 06/96 184/96
Costa Rica Energy Assessment (English and Spanish) 01/84 4655-CR
Recommended Technical Assistance Projects (English) 11/84 027/84
Forest Residues Utilization Study (English and Spanish) 02/90 108/90
Dominican
Republic Energy Assessment (English) 05/91 8234-DO
Ecuador Energy Assessment (Spanish) 12/85 5865-EC
Energy Strategy Phase I (Spanish) 07/88 --
Energy Strategy (English) 04/91 --
Private Mini-hydropower Development Study (English) 11/92 --
Energy Pricing Subsidies and Interfuel Substitution (English) 08/94 11798-EC
70
LIST OF FORMAL REPORTS
71
TURKEY’S EXPERIENCE WITH GREENFIELD GAS DISTRIBUTION SINCE 2003
GLOBAL
72
LIST OF FORMAL REPORTS
73
Energy Sector Management Assistance Program (ESMAP)
1818 H Street, NW
Washington, DC 20433 USA
Tel: 1.202.458.2321
Fax: 1.202.522.3018
Internet: www.esmap.org
Email: esmap@worldbank.org