This year has involved a number of important legislative developments in relation to the energy markets. First, a new law regulating the electricity market was enacted in March 2013. Next, the long-awaited new Petroleum Law came into force in May. Finally, a draft law is now underway that will dramatically change the Natural Gas Market Law (4646/2001).

The draft law does not intend to reform the natural gas market; that reform was made in 2001 when Turkey first started the liberalisation process in the market by enacting the existing law. The draft law instead aims to fine-tune this earlier legislation and further facilitate the liberalisation process. This update briefly sets out some of the highlights of the draft law.

Written agreement obligation

Article 2 of the draft law sets forth that all agreements between licensed companies in the natural gas market must be made in writing. However, considering the stamp tax burden that this provision could impose on licensed companies, the draft law exempts all such agreements from stamp tax. The parties to these agreements must notify the Energy Market Regulatory Authority of the agreements that they have signed.

Article 2 further sets forth that the Energy Market Regulatory Board will determine the principles regarding the agreements to be signed between the licensed operators. If the board decides to regulate the principles related to such agreements in detail, this may lead to all important agreements in the market becoming form agreements, leaving little room for private arrangements based on the parties' free will. Although this may appear advantageous from the authority's perspective, as it would no longer need to deal with numerous agreements that each have different provisions, it would not be in line with the principles of a free and liberal market. The parties must be able to determine the provisions of their agreements freely in line with market conditions.

Licences

Import
Under the draft law, in order for a company to obtain an import licence it must:

• have sufficient financial resources;
• submit to the authority the agreement that it signed to purchase the imported natural gas;
• submit to the authority information regarding the source of the natural gas, reserves, production facilities and transmission system that it will obtain from the seller of the natural gas;
• have the ability to store natural gas in the amount determined by the board; and
• obtain the approval of the Ministry of Energy and Natural Resources.

The information stated under the third bullet point above may be difficult for the importer to obtain, as the natural gas that Turkey imports is generally purchased from neighbouring state companies, which may be unwilling to submit detailed information on their reserves or production facilities.

The requirement to obtain ministry approval is an amendment introduced by the draft law. This issue has been widely discussed as it will increase the government's influence in what should be a liberal market.

Storage
Under the draft law, in order for a company to obtain a storage licence it must:

• have sufficient financial resources;
• guarantee that it will manage its activity and storage capacity to ensure that the system is conducted in a coordinated and safe manner; and
• guarantee that it will offer its storage capacity in an objective and equal way.

The only amendment introduced by the draft law is the removal of the condition in the existing law that requires a company to have "sufficient technical resources" in order to obtain a storage licence. The wording of the second and third bullet points above remains the same as under the existing law, signalling the importance that the ministry places on the sustainable supply of natural gas in Turkey. Storage activity plays an important role in the sustainable supply of natural gas and in keeping reserves that can be used in case of a shortage in Turkey. As Turkey is dependent on imports from Russia, Azerbaijan and Iran for its natural gas supply, keeping sufficient reserves of natural gas makes Turkey less dependent on diplomatic relations with these countries. Under the second bullet point above, the authority is entitled to require storage companies to conduct sales in Turkey in case of a shortage of natural gas.

Wholesale
In order for a company to conduct wholesale activities, it must be licensed by the Energy Market Regulatory Board. The only exception is import companies, which are not required to obtain a wholesale licence to conduct wholesale activities.

Wholesale companies must take the necessary precautions for balancing the supply of natural gas, as required by the board. They must also guarantee the supply of natural gas during the term of any agreements signed with distribution companies. Furthermore, wholesale companies must supply natural gas to their customers within certain seasonal, daily or hourly flexibility limits. All these obligations impose a heavy responsibility on wholesale companies.

Any failure of such companies to supply natural gas under a wholesale agreement will result in a breach of both that agreement and the law. In order to manage the risks of a failure to supply the required amount of natural gas, wholesale companies must insert recourse provisions into the purchase agreements that they sign with the companies that supply them with natural gas. Furthermore, an insurance policy is advisable to cover any risk of failure to supply such gas. As wholesale companies can determine the wholesale price freely, they should be able to determine the wholesale price such that it includes the financial burden of managing this risk.

The draft law sets forth that wholesale companies must include in their customer portfolio companies that can contribute to the balancing of the system by reducing their demand for natural gas. The ratio of this type of customer to ordinary customers can be determined by the authority. With this new provision, the draft law aims to facilitate the balancing of the natural gas transmission system. As demonstrated in the electricity market, in cases where demand is higher than supply and it is difficult to increase supply, it is vital that the system can reduce demand immediately. Therefore, this new provision is one of the most positive amendments introduced by the draft law.

Distribution
As regards distribution, the draft law sets out similar provisions to the existing law. Under both the draft law and the existing law, distribution licences will be granted through tenders opened for different distribution zones in Turkey. If the distribution company requests the renewal of its distribution licence from the authority one year before the end of its licence period, the Energy Market Regulatory Board can renew the licence without making a tender, taking into consideration:

• the company's financial resources;
• customer satisfaction in relation to distribution services; and
• the quality of the services.

If no such renewal request is made by the distribution company, or if such a request is rejected by the board, a new tender must be opened for the grant of the distribution licence in the relevant zone for a new term.

The draft law provides no clarification regarding the transfer of ownership of a distribution system where no renewal is made and the tender is awarded to another company for the second term. The draft law sets forth (as did the existing law) that a distribution company can sell its distribution system to a third company before its distribution term expires, provided that approval is granted by the Energy Market Regulatory Board. Although this provision may provide a solution where the first distribution company and the company awarded with the licence for the second term agree on the transfer of ownership of the distribution system, it is unclear how the transfer of ownership will be handled where there is no agreement between the parties. It had been hoped that the draft law would introduce an amendment clarifying this situation and provide a solution.

Furthermore, the controversial issue of the participation of municipalities in the shareholding of distribution companies (which was adopted by the existing law) remains. The draft law sets forth that a company that is granted a distribution licence must invite the municipality to become a shareholder of the company and hold 10% of the shares of the distribution company without injecting any capital. If the municipality does not take over the shares, or does not obtain the right to appoint at least one of the members of the board of directors of the distribution company, the authority can request that the distribution company make the necessary arrangements for representation of the municipality in the board of directors of the company.

It has been argued that the above-mentioned provision should have been removed by the draft law, as it does not comply with the Constitution. If the municipality is going to be a 10% shareholder without injecting any capital, it means that either:

• the company must make a capital increase in 10%, where the payments of that capital increase will be made by the other shareholders of the company and the newly issued shares will be granted to the municipality; or
• if the company makes no capital increase, the current shareholders must give away 10% of their shares to the municipality without asking any consideration.

Such a mandatory capital increase or share transfer of which the sole purpose is to make the municipality a shareholder does not comply with the principles of expropriation or nationalisation set forth under Articles 46 and 47 of the Constitution.

EPIAS

The new Electricity Market Law introduced a new corporation, the Energy Markets Operating Corporation (EPIAS), which aims to conduct operating activities in the energy markets in a more effective manner. Operations were due to start on September 30 2013, but have not yet commenced. As is clear from its name, EPIAS will be responsible not only for the electricity market but also for other energy markets (eg, the natural gas market).

The draft law also refers to EPIAS and sets forth that financial settlement activities in the natural gas market should be handled by EPIAS. The draft law assigns the Istanbul Stock Exchange as the entity that will operate the purchase and sale of standardised natural gas purchase agreements, as well as any derivatives dependent on such agreements. This would enable the determination of a reference price for the natural gas sale price.

Although not explained in detail under the draft law, the reference made to EPIAS is a signal that a balancing and settlement system similar to that in the electricity market will also be adopted in the natural gas market. In light of the above, it is clear that the provisions related to EPIAS in the draft law will make an important contribution to liberalisation of the market.

Last resort supplier

Another concept shared with the new Electricity Market Law is that of a last resort supplier. Such suppliers are those companies that are determined by the Energy Market Regulatory Board to supply natural gas to:

• customers that cannot get natural gas from the importer or wholesaler that undertook to supply them with natural gas; or
• eligible customers that cannot get natural gas from any other source.

Last resort suppliers are under an obligation to store a sufficient amount of natural gas to respond to the seasonal needs of their customers. The introduction of the last resort supplier concept in the natural gas market is another precaution taken by the legislature to ensure the sustainable supply of natural gas in the market.

Comment

The draft law will significantly further liberalisation of the natural gas market. It will also bring new measures for the sustainable supply of natural gas in the market and for the balancing of the system. These are positive signs that the ministry is determined to take steps to make the natural gas market a liberal market in which most activities are conducted by private companies and natural gas shortages do not occur. However, the draft law still falls short of expectations, as it still comprises elements of a market governed by the state. However, it is still under the process of negotiation and will likely be improved following the opinions of market players and members of Parliament.

For further information on this topic please contact Serra Basoglu Gurkaynak or Ozan Karaduman at Mehmet Gün & Partners by telephone (+90 212 354 00 00), fax (+90 212 274 20 95) or email (serra.gurkaynak@gun.av.tr or ozan.karaduman@gun.av.tr).

This article was originally published in the Energy & Natural ResourcesNewsletter of the International Law Office - www.internationallawoffice.com