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Cablegate: Got Electricity Hikes Affect Mission Turkey's Bottom Line

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

UNCLAS ANKARA 001183

SENSITIVE
SIPDIS

EUR-IO/EX/PMO Sharon Russell-Nordberg

E.O. 12958:N/A
TAGS: ABUD AFIN AMGT ECON ENRG TU
SUBJECT: GOT Electricity Hikes Affect Mission Turkey's Bottom Line

1. (SBU) Summary. The GOT is moving to eliminate subsidies in the
electricity sector. This is a welcome and necessary step for
privatization of the sector. The combination of high fuel prices
(input for electricity generation) and a GOT-imposed price ceiling
on electricity prices has resulted in debts in the sector;
businesses operating at a loss; and lack of investment. However,
removing subsidies means higher electricity prices. Higher prices
will affect all consumers in Turkey, including the U.S. Embassy and
Consulates in Istanbul and Adana. See para 7 for a cost estimate on
USG operations on Turkey. End summary.

The Rationale for Higher Prices
-------------------------------

2. (U) For five years, from 2002-2007, the GOT did not raise
electricity prices. State Minister for Treasury Mehmet Simsek told
us that this amounted to over 25 billion lira (approx 20 billion
USD) in subsidies to electricity consumers. During that time, the
price of fuels used to generate electricity (such as oil, gas and
coal) rose by dramatically. As a result, state-owned electricity
generation (EUAS), electricity price clearing house (TETAS) and
electricity distribution companies (TEDAS) have accumulated large
debts. Most of these entities have been operating in the red for
the last few years.

3. (U) In January 2008, perhaps in preparation for privatization of
Turkey's distribution companies, the GOT took the first steps to
remedy the situation. After many contentious discussions between
the Minister of Energy and the Prime Minister as reported in the
press, the GOT raised the electricity price 15% for households and
10% for industry. Also in January, BOTAS (the state oil and gas
pipeline company) which has been subject to world market prices all
along because it has a near monopoly on importing gas to Turkey,
implemented a 7.4% price increase for households and 6.5% for
industry.

Automatic Mechanism Removes Politics from Prices
--------------------------------------------- ---

4. (U) Then, in February 2008, the High Planning Council (a body
within the Cabinet of Ministers) resolved to implement an automatic
pricing mechanism for electricity and gas. This is good news for
the health of the electricity sector because it takes the politics
out of electricity and gas prices. Also, getting the electricity
price right will encourage investment in the sector. In the last
five years, investment has been severely suppressed because
investors could make little to no profit from the GOT-set
electricity price.

5. (U) The GOT named the new pricing system the "Cost-Based Pricing
Mechanism." According to this new mechanism, all the related State
Economic Enterprises (SEEs) will set their tariffs three times a
year (April, July, October), according to a methodology. The
increases will be indexed to a number of variables, like the foreign
exchange rate, oil prices, and the consumer and producer price
indexes. According to the High Council, the Cost-Based Pricing
Mechanism (CBPM) will take effect July 1, 2008.

Gas and Electricity Prices Increase, Again
------------------------------------------
6. (U) As of June 1, 2008, BOTAS implemented a second gas price
increase of 7.4% for households and 8.3% for industry. On the
electricity side, the GOT announced a 21% increase for industrial
consumers and 22% increase for households which will go into effect
on July 1 along with the CBPM. The actual rate of increase to
consumers could be higher than these percentages, since additional
taxes, fees and inflationary adjustments could be added.

Impact on Embassy and Consulate Operations
------------------------------------------

7. (SBU) We crunched the numbers regarding the impact of two gas
and two electricity increases on Mission Turkey's budget. These
numbers include the Embassy, Istanbul Consulate and Adana Consulate.
We estimate the costs as follows:

Program:
Gas annual cost - $17,161
Electricity annual cost - $108,090

ICASS:
Gas annual cost - $4,570
Electricity annual cost - $423,670

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