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Cablegate: Turkey: Unpopular Gas Price Increases Go Forward

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

UNCLAS SECTION 01 OF 02 ANKARA 001914

SENSITIVE
SIPDIS

EEB FOR SPECIAL ENVOY FOR EURASIAN ENERGY GRAY
EEB FOR ENERGY COORDINATOR MANN
EUR FOR DAS BRYZA

E.O. 12958:N/A
TAGS: ECON ENRG TU
SUBJECT: TURKEY: UNPOPULAR GAS PRICE INCREASES GO FORWARD

REF: ANKARA 1183, ISTANBUL 495

1. (SBU) Summary. On November 1, the Turkish gas import monopoly
BOTAS announced a 22.5% price increase in gas for households and 22%
for industry. This is the fifth gas price increase in 2008 and
brings the total gas price increase to over 70% so far this year.
At a press conference on November 3, Energy Minister Guler said the
implementation of an automatic pricing mechanism for electricity and
gas left the GOT no options but to allow prices to increase, and
also blamed the recent lira devaluation. Under the new pricing
mechanism, only the Prime Minister can block a price increase.
However, BOTAS' tenuous financial health also forced the GOT to
allow the increase. This was a tough decision for the GOT in
advance of March 2009 local elections and should help reassure
investors that the GOT no longer wants to meddle in electricity and
gas pricing decisions. End summary.

2. (SBU) BOTAS's announcement to raise gas prices by 22.5% for
households and 22% for the industry is the fifth gas price increase
since the beginning of 2008. In January, the increase for
households was 7.4% and industry 6.5%; in June, 7.4% and 8.3%; in
August, 16.88% and 18.77%; in October, 4.55% and 4.69% respectively.
The cumulative increase in gas prices since January 2008 was 72.7%
for households and 74.9% for the industry. Since about half of
Turkey's electricity is produced with natural gas, the gas price
increase is expected to bring about a double digit increase in
electricity prices in January 2009. (Note: Electricity prices have
already risen about 60% this year. End note.)

3. (SBU) Turkey implemented the automatic pricing mechanism July 1,
2008. This mechanism is basically a cost pass-through mechanism and
an important step in liberalizing gas prices in Turkey. The price
increases have been dramatic because electricity (and gas) prices
were held constant from 2002-2007. The increases earlier in the
year were aimed at shoring up the financial health of the sector
prior to privatization. Surprisingly, the large gas price increase
comes only months before scheduled local elections in March 2009.
According to the formula, gas prices are adjusted monthly while
electricity prices are adjusted quarterly. The price changes go
forward automatically, unless the Prime Minister intervenes.

4. (SBU) Energy Minister Guler and BOTAS Chairman Saltuk Duzyol
held a press conference on November 3 to respond to criticism over
gas price increases. Guler said the GOT had no control over the
world oil prices and fluctuating exchange rates and was taking the
steps required by Turkey's automatic pricing mechanism. Guler added
that the oil prices are now in a downward trend, and without further
depreciation of the lira, gas prices would drop in the in the first
quarter of 2009. Duzyol noted the 33% devaluation in lira against
USD in the past month, and compared favorably the 150% increase in
world oil prices in the past 10 months to BOTAS action to increase
gas prices by 73% for households and 75% for industry. Duzyol
claimed that the gas price increases in Turkey remained below the
increases in European countries.

5. (SBU) Another impetus for this gas price increase is the
strained financial situation of BOTAS. The Government of Turkey is
one of the largest debtors to BOTAS. The city of Ankara owes BOTAS
over USD 1 billion. The city had hoped to pay its debt using the
proceeds from privatization of the city gas distribution network.
Unfortunately, the winning bidder recently withdrew from the deal
because his promised bank financing was withdrawn. We have also
heard that BOTAS owes money to the Treasury. Electricity
generators, like Unit Energy Systems S.A., have told us they have
received letters from the Treasury demanding that payments owned to
BOTAS for gas purchases be sent to the Treasury to resolve BOTAS's
debts.

6. (SBU) Comment: The automatic pricing mechanism is new and
investors are waiting to see how it will be implemented. This
latest large and unpopular gas price increase, coming shortly before
an important local election, should help instill confidence in
investors that the GOT no longer wants to meddle in pricing
electricity and gas. Additionally, Turkey's market liberalization
is continuing. One of the criticisms we hear from investors who are
considering entering the market is the unpredictability of future
electricity and gas prices. Turkey has a wholesale spot market for
electricity but it represents less than 20% of the total electricity
market. Because of the tight electricity supply, the price in this
market is higher than the price between state-owned generators and
distributors. According to Ministry of Energy expert Ozturk
Sevintop, Turkey will create a futures market for electricity in
2011 to give greater predictability to future utility prices. This
also may help bring investors into the sector. End comment.

ANKARA 00001914 002 OF 002

WILSON

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