Price Regulation & Tariffs 05 – 08 March 2013, Budapest

CASE STUDY PRICE REGULATION OF THE NATURAL GAS SECTOR IN TURKEY

Okan YARDIMCI Energy Expert, Energy Market Regulatory Authority, TURKEY

ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest - HUNGARY Outline

General Information Turkey Natural Gas Market Energy Market Regulatory Authority (EMRA)

Price Regulations of the Natural Gas Sector

Major Pipeline Projects Transit Tariff

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Turkey

Population ~ 75 million Area ~ 800,000 km2 GDP per capita ~ $15,000 Currency Turkish Lira

Place of the Turkey's Natural Gas Consumption in the World 50 1,5% 47 43 40 1,2%

32 30 0,9% 27 24 20 0,6%

Countryrankingby cons. 10 0,3%

Proportionof the cons. Turkey In the presentation; 0,004% 0,2% 0,3% 0,6% 1,0% 1,2% 1 m3 = 9155 kcal = 0,038304520 GJ 0 0,0% 1 TL = 2,3 Euro 1985 1990 1995 2000 2005 2010

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Turkey

TURKEY NATURAL GAS SUPPLY - 2011 (44,5 BCM) Natural Gas Consumption of Turkey Annual consumption forecast for 2013; 47.6 BCM 50 Spot LNG; 2% Domestic Production; 2% Nigeria LNG; 3% 45 Algeria LNG; 9% Azerbaijan; 9% Import 40

Russia; 57% 35 Iran; 18% 30

15 billion cubic meters cubic billion ~ 450 billion cubic meters Domestic 10 Production 5

Market liberalisation

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Turkey

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Natural gas market structure before 2002

Imported Gas State owned comp. BOTAŞ was the monopoly on; LNG Facility  Import & Wholesale,  Transmission, BOTAŞ  Distribution,  Storage  Sale Industry Residential Determination of Distribution Power wholesale prices, retail prices, connection fees Domestic Gas

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Natural gas market structure after 2002

SUPPLY MARKETING CONSUMPTION

Import Export

Wholesale Eligible Customers

CNG

Domestic Prod. Distribution

TSO Non-Eligible Customers

Storage Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest BOTAŞ

Established in 1974. Purpose: transportation of Iraqi crude oil

In 1984 Turkey and S.S.C.B. signed a natural gas transmission agreement. Then companies signed gas trading agreement. BOTAŞ activity-field was expanded: transportation and trade of natural gas.

2001: BOTAŞ’s monopoly rights on natural gas import, distribution, sales and pricing were abolished by the Natural Gas Market Law.

Network Code is in force since 1st September, 2004.

Account separation for trade, transmission and storage.

BOTAŞ is still the major market player.

Market shares in 2013 (estimated); BOTAŞ : 75% 20 Shippers : 25 %

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest EMRA

• Energy Market Regulatory Authority founded on 19 November 2001 with the Electricity Market Law – Independent – Financially and administratively autonomous public institution

• Decision making body of EMRA is the Energy Market Regulatory Board – Appointed by the Council of Ministers – A chairman, a vice chairman and 7 members – Chairman is the President of the Authority – The term of office for the chairman and members of the Board is 6 years – Board members may be re-elected following the expiry of their terms of office

• Duties and responsibilities of EMRA have been extended to include; – Natural Gas Market in 2001 – Petroleum Market in 2003 – LPG Market in 2005

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest EMRA

• EMRA is responsible mainly for; – Preparation of secondary legislation – Setting out the annual eligibility limit – Issuing licenses – Monitoring market performance and ensuring the conformity with the market rules – Drafting, amending, enforcing and auditing performance standards, distribution, transmission and customer services codes – Approving the regulated tariffs, setting out the pricing principles

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Turkish natural gas market restructuring

• Enactment of the Natural Gas Market Law – 2001 – The aim: to liberalize the market and encourage privatization and competition – Natural gas supply; Good quality Economical Reliable Environment friendly – To create a financially sound, stable and transparent market – To establish an independent regulatory authority to supervise and monitor market – Licensing by EMRA for gas transmission, export, import, wholesale, distribution, CNG and storage – BOTAŞ -> transfers long-term gas supply agreements to the private sector – To ensure natural gas supply with a competitive prices to consumers – To maintain supply security

Liberalization Steps / EU Integration Account Separation -> Realised Third Party Access (2007) -> Realised Legal Unbundling -> Not realized yet

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Some other targets level of progress

Market control and regulation; All legal entities are required to obtain a license from EMRA Prevention of monopoly; No legal entity is allowed to sell more than 20% of the annual gas consumption of Turkey Non discrimination; Gas companies are not allowed to establish another company in the same field Security of supply; Import and wholesale companies are required to store 10% of the imported or sold natural gas supplies Eligibility; all consumers are eligible except the household consumers Cross-subsides; Prohibition of cross subsidy and unbundling of BOTAŞ’s activities as transmission, storage and trade Monitoring; Transmission and distribution companies are obligated to demonstrate EMRA that their operations are cost efficient, effective and reliable Transparency; Electronic Bulletin Board (EBB) is required in the framework of the Network code

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Secondary legislation

• License regulation • Certificate regulation • Distribution & consumer services regulation • Tariffs regulation • Transmission network operation regulation • Facilities regulation • Storage regulation

Board decisions & communiqués

Governance is an important principle in the activities of EMRA. For instance, when the drafting of any piece of secondary legislation is completed, the document is publicized on the EMRA web site in order to collect the comments and views of market participants and interested parties. The final version of such regulatory texts is finalized after incorporating the views of the public.

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Natural gas market activities

IMPORT WHOLESALE TRANSMISSION DISTRIBUTION

15 + 30 spot LNG 42 1 pipeline + 24 LNG 63

COMPRESSED NATURAL GAS STORAGE EXPORT

75 4 4

Total number of licences; 258 Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Natural gas system in 2002

Russian Fed. Russian Fed. Azerbaijan (Agreement) (Blue Stream) (West) GEORGIA 6,6 BCM 6 + 8 = 14 BCM BLACK SEA 16 BCM

Kofçaz Turkmenistan (Agreement) Kırklareli 16 BCM Zonguldak Algeria+Nigeria Bartın İstanbul Ereğli Tekirdağ Samsun Ardahan (LNG) Ordu Trabzon Artvin İzmit Çankırı Rize 4 BCM + 1,2 BCM M.Ereğlisi Bolu Giresun Kars Sakarya Amasya Gümüşhane Çan Karacabey Çorum Tokat Bayburt Çanakkale Bilecik Bursa Ankara Yozgat Iğdır Sivas Horasan Yapracık Erzincan Erzurum Iran Eskişehir Ağrı Doğubayazıt Balıkesir 10 BCM Aliağa Kırşehir Afyon Manisa Uşak Kayseri Van Elazığ İzmir Turgutlu Nevşehir Malatya Aksaray Batman Aydın Konya Diyarbakır Denizli Adıyaman Şırnak Isparta Kahramanmaraş Burdur Ereğli Araban Bozova Silopi Muğla Seydişehir Adana Mardin Karaman Gaziantep Şanlıurfa Ceyhan Dörtyol Mersin İskenderun Hatay SYRIA IRAQ

KKTC Trnsmission pipelines by 2002 (~4000 km)

LNG Liquifaction Terminals

MEDITERRANEAN SEA Planning Natural Gas Underground Storage

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Length of the transmission network

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Natural gas system in 2013 Azerbaijan Russian Fed. Russian Fed.(West) 6,6 BCM (5,4 BCM BOTAŞ, (Blue Stream) 8 BCM (4 BCM BOTAŞ, 4 BCM Private Comp.) 1,2 BCM SOCAR) 16 BCM + 16 BCM (SHAH DENIZ 2) Russian Fed.(West) Greece 6 BCM (Private Comp.) 0,75 BCM Turkmenistan (Agreement) 16 BCM

Algeria+Nigeria Iran (LNG) 10 BCM 4 BCM + 1,2 BCM

Spot (LNG) BOTAŞ+Private Comp.

Underground Storage LNG Gasification Terminals Planning Natural Gas Underground Storage

Planning LNG Gasification Terminals

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Import

BOTAŞ is required to transfer its import contracts until its market share decreases to 20%

The first contract release tender was completed by BOTAŞ on 30th of November 2006.

Company Transferred amounts (million cm3) 1 Shell Enerji A.Ş. 250 2 Bosphorus Gaz A.Ş. 750 3 Enerco Enerji San. ve Tic. 2500 4 Avrasya Gaz A.Ş. 500 The second contract release tender was completed by BOTAŞ on 1st of January 2013.

Company Transferred amounts (million cm3) 1 Bosphorus Gaz A.Ş. 1750 2 Akfel 2250 3 Kibar 1000 4 Batı Hattı 1000 Azerbaijan contract release to SOCAR completed by BOTAŞ on 1st of January 2013.

Company Transferred amounts (million cm3) 1 SOCAR 1200 Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Existing contracts

QUANTITY CONTRACTS (BCM/YEAR)

RUSSIAN FED. West-1 6 (Private Companies)

RUSSIAN FED. West-2 * 8 (4 BCM BOTAŞ, 4 BCM Private Companies) RUSSIAN FED. Blue Stream 16

IRAN 10

AZERBAIJAN 6.6 (5.2 BCM BOTAŞ, 1.2 BCM SOCAR)

TURKMENISTAN 16

ALGERIA (LNG) 4

NIGERIA LNG) 1.2

16 BCM/ SHAH DENIZ 2 PROJECT AZERBAIJAN (Trans Anatolia Pipeline-TANAP agreement was signed in 2012)

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Wholesale

• No obligation of obtaining wholesale license for import companies

• Amount sold by each wholesale company shall not exceed 20% of national consumption forecast

• Storage obligation in order to meet maximum seasonal natural gas demand of the customers.

• Tariffs; Shall be determined freely among parties concerned in free market conditions.

Because BOTAŞ was the only importer in the market, the sales prices had been determined by the Board between November 2002 and December 2007.

Deregulated in the beginning of 2008.

According to current tariff structure, prices are determined freely. Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Cross subsidization…

We should not; disturb the electricity market…

& loose the cheap LNG opportunities.

market based price is important…

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Distribution

Household n.g. consumption before 2002; 7 DC in 6 provinces 6 municipal corporation 1 private company

KIRKLARELİ BARTIN KASTAMONU SİNOP TEKİRDAĞ EDİRNE İSTANBUL ZONGULDAK ARTVİN ARDAHAN KARABÜK SAMSUN KOCAELİ DÜZCE RİZE TRABZON YALOVA SAKARYA ORDU GİRESUN BOLU ÇANKIRI AMASYA GÜMÜŞHANE ÇORUM TOKAT ÇANAKKALE BURSA KARS BİLECİK BAYBURT IĞDIR ANKARA ERZURUM KIRIKKALE BALIKESİR AĞRI YOZGAT ERZİNCAN ESKİŞEHİR SİVAS KÜTAHYA KIRŞEHİR TUNCELİ BİNGÖL MANİSA AFYON MUŞ UŞAK NEVŞEHİR KAYSERİ MALATYA ELAZIĞ VAN İZMİR BİTLİS AKSARAY ISPARTA KONYA DENİZLİ DİYARBAKIR AYDIN NİĞDE KAHRAMANMARAŞ SİİRT BATMAN ADIYAMAN HAKKARİ BURDUR ŞIRNAK MUĞLA MARDİN ADANA KARAMAN OSMANİYE ŞANLIURFA ANTALYA GAZİANTEP KİLİS İÇEL

HATAY

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Distribution

Household n.g. consumption now; 63 DC in 70 provinces 2 municipal corporation 61 private company

KIRKLARELİ 2006 BARTIN KASTAMONU İSTANBUL 2007 SİNOP TEKİRDAĞ ZONGULDAK SAMSUN ARTVİN ARDAHAN EDİRNE 1992 KOCAELİ 2012 2007 DÜZCE 2007 1992 KARABÜK 2004 2006 2005 2008 TRABZON RİZE YALOVA ORDU 2008 KARS SAKARYA ÇORUM AMASYA GİRESUN 2008 2005 2002 BOLU ÇANKIRI 2008 2007 2006 2004 2010 GÜMÜŞHANE 2006 2007 TOKAT ÇANAKKALE BURSA BİLECİK BAYBURT ERZURUM 2008 IĞDIR 2006 2008 2007 2004 2006 BALIKESİ 1992 ANKARA KIRIKKALE 2009 R AĞRI ESKİŞEHİR YOZGAT ERZİNCAN 1988 2004 SİVAS 2006 2004 1992 2006 2008 KÜTAHYA 2004

2004 KIRŞEHİR TUNCELİ MANİSA 2004 BİNGÖL AFYON 2006 MUŞ UŞAK 2006 NEVŞEHİR KAYSERİ İZMİR 2003 ELAZIĞ BİTLİS AKSARAY 2004 MALATYA VAN 2005 2006 2007 KONYA 2004 2006 2007 AYDIN DENİZLİ 2004 KAHRAMANMARAŞ DİYARBAKIR SİİRT ISPARTA NİĞDE 2009 2006 2006 2007 BATMAN 2009 2006 2006 ADIYAMAN BURDUR 2011 HAKKARİ 2007 ŞIRNAK 2006 ADANA MARDİN MUĞLA KARAMAN 2008 OSMANİYE ŞANLIURFA ANTALYA 2006 2008 GAZİANTEP 2007 2011 KİLİS 2007 2006 İÇEL 2011 2005 HATAY starting year of household consumption 2011

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Distrubition licence tenders

• Distribution licenses granted through a tender process.

• Evaluation based on the unit service and depreciation charge (distribution fee) for supplying one kWh natural gas to consumers.

• Constant tariff is valid for 8 years. Licenses granted for 30 years.

• After 0 distribution fee, tenders were continued with reduction of connection fee.

• In one region, after 0 connection fee, tender was continued with licence fee.

• Distribution companies are required to gasify every region in their respective territories in five years.

• Distribution companies are obliged to prove that they purchase from the cheapest source and they are obliged to purchase natural gas at least from two different sources.

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Storage

BOTAŞ Marmara Ereğlisi LNG Terminal 2.000.000.000 3 O.Yardımcı, F.Ceran, April 2011 Yearly Send-Out Capacity : 8.2 Billion m 1.500.000.000 (Tank Capacity; 3 X 85.000 m3 LNG tanks) Daily Maximum Sent Out : 18.7 million m3/day 1.000.000.000

500.000.000

0 03 04 05 06 07 08 09 10

TPAO Silivri Underground Natural Gas Storage Facilities Type : Depleted gas fields (Değirmenköy and Kuzey Marmara Fields) Total Storage Capacity : 2.7 Billion m3 Maximum Sent Out : 14.5 million m3/day EGEGAZ Aliağa LNG Terrminal Yearly Send-Out Capacity : 6.0 Billion m3 LONG TERM CONTRACT BETWEEN TPAO&BOTAŞ FOR 2,1 BCM (Tank Capacity; 2 X 140.000 m3 LNG tanks) Daily Maximum Sent Out : 16.4 million m3/day

Underground Storage LNG Gasification Terminals Planning Natural Gas Underground Storage

Planning LNG Gasification Terminals

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Export

Export licence;

• Technical and economic capability

• Information on destination country and means of transportation Gas sale agreements

• Obligatory insurance coverage

Technical capacity of transmission company is an important issue

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Third party access

Transmission and distribution companies have an obligation to connect all users to the system.

In case of rejection of access to system, EMRA’s decision shall be final and binding.

Transmission and distribution companies are obligated to demonstrate EMRA that their operations are cost efficient, effective, non-discriminative and reliable.

Network code has been in force since 1st of September 2004.

Capacity allocation is made on entry-exit system for one year base.

In case of congestion, it is arranged proportionally (pro-rata) for the applications.

Capacity usage is based on use or loose it principle

Storage companies shall prepare the basic usage principles and procedures for each storage facilitiy.

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Privatization

The last two gas grid; BAŞKENTGAZ (Ankara) and İGDAŞ (İstanbul) shall be privatized

The new distribution companies will be private companies

The trade and storage companies of BOTAŞ shall be privatized Reducing BOTAŞ’s share in import

BOTAŞ shall be involved only in transmission activities

Distribution Volumes, Private Companies / State Owned Companies

12 BCM 10 Private 8 companies

State 6 owned companies 4

0 2002 2003 2004 2005 2006 2007 2008 2009

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Outline

General Information Turkey Natural Gas Market Energy Market Regulatory Authority (EMRA)

Price Regulations of the Natural Gas Sector

Major Pipeline Projects Transit Tariff

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Price regulation

price regulation

competition no competition or natural monopoly

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Tariffs

Transmission & Dispatch Control

Wholesale

Storage

Distribution

Connection Connection (non-eligible customers) (eligible customers)

Regulated tariffs

Price is determined by the parties (wholesale and storage tariffs are regulated temporarily - provisional article of law) wholesale -> competition storage -> enough capacity

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Price components

Components of Household Gas Price (7,950 Euro/GJ) fiscal legislation fiscal legislation Private Consumption Tax; 3,6% Value Added Tax; 15,3%

Storage Fee; 0,8% Average Distribution Fee; 2,9% 74,3%; Gas Price + Wholesale Average Profit Transmission Fee; 3,2%

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Tariff definition process

Approval/determination of tariffs by the Board

Studies completed and submitted to the Board

Correspondence with the relevant department, exchange of data

If necessary, request additional information and arrange meetings

Reviewing the proposals and financial tables

Submission of tariff proposals, the financial and technical information

Request an information-documentation basis for the tariffs

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Risk & Return

“investment decision means; to give up something - opportunity cost!!!”

risk / return relationship

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest “fair” rate of return?

Resonable Return + for Regulatory Asset RAB Risk Free Risk Base Rate Premium

Risk of Creditors + Risk of Shareholders DEBT EQUITY

Risk Free Rate + Debt Risk Premium Risk Free Rate + Equity Risk Premium Rf + ( Spread ) Rf + ( βe x Market Risk Premium ) Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest WACC (transmission tariff, 2011-2013 period)

Risk Free 20-year T-Bond Yield Ratio Rate x 1,127 to 10-year T-Bond in US, 11,40% 1,127

2005-2010 USA Debt Risk Cost of Debt (C-Bond) – (T-Bond) Premium After Tax Corporate Risk Free Rate Difference (Average of max. and min.) 3,79% 12,15% Tax Rate 20,00% 10,11% Corporate 10 years Turkish T-Bond 50% Nominal Interest Rate Tax (Average of max. and min.) 20,00% WACC WACC WACC Nominal Nominal Real After Tax Before Tax Before Tax 15,58% 19,48% 10,80%

Rating of Turkey = BB+ Unlevered Relevered Risk Free 50% Beta Beta Rate x 1,127 0,45 0,81 11,40% Expected Average of some Cost of Inflation EU countries Market Risk Equity Risk Equity 7,83% 19,01% Premium Premium Central Bank 6,00% 7,61% Survey of CPI Expectations (Average of Max and Min) Stock/Bond Yield Spread in USA + Turkey’s Risk Premium Country Risk Premium Okan YARDIMCI Turkey / USA Eurobond Price Regulation of the Natural Gas Sector in Turkey 3,40% Rate Difference ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest WACC parameters

Risk Free Rate

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest WACC’s in ERRA members

Real WACC in some ERRA members 16%

14%

12%

10%

Natural Gas Distribution Natural Gas Transmission

Turkey Average

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Inflation vs Real WACC

35% 30,2% Inflation vs Real WACC 30% Inflation Real WACC 25% 23,4% 20,5% 19,6% 19,7% 20% 14,9% 15,3% 14,6% 15% 10,8% 10%

0% 2003 2004 2005 2006 2007 2008 2009 2010 2011

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Evaluating RAB? (Real WACC vs Nominal WACC)

NPV ANALYSIS - CUMULATIVE REVENUE OF 1000 EURO INVESTMENT 1.250 1.200 1.150 1.100 1.050 1.000 950 900 850 800 750 - 22 year linear depreciation 700 650 - Real WACC; %10,80 600 550 - Inflation; %7,83 500 450 400 Real WACC + Evaluating RAB with Inflation 350 Nominal WACC, RAB is not Evaluating with Inflation 300 Nominal WACC + Evaluating RAB with Inflation 250 200 150 100 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

220

200 YEARLY REVENUES OF 1000 EURO INVESTMENT

180

160 Real WACC + Evaluating RAB with Inflation 140 Nominal WACC, RAB is not Evaluating with Inflation 120

100

0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Main principles of tariff structure Tariffs

Others; • Transparency: in the methodology, so that all employed criteria & procedures are made public

• Stability: in the adopted methodology, so that the concerned agents have the least possible regulatory uncertainty. Stability is compatible with a gradual process of adaptation of the present tariffs to the new system

• Simplicity: in the methodology & its implementation, as far as possible

• Non-discrimination: Non-discrimination among equal parties

• Cost reflective prices: Costs not directly related to market operations shall not be included. Cross subsidies are not allowed

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Tarification

Revenue Cap – Transmission, Storage

Corrections ► Revenue Difference Correction ► Investment Difference Correction ► Cost Difference Correction

Efficiency Investment Average Correction Factor (Asset Value) RAB Mechanism

+ +

OPEX Depreciation Return Revenue Quality Tariff Update Requirement Factor by CPI (not applied)

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Transmission & dispatch control tariff

 The Board shall determine prices for transmission activities having a naturally monopolistic character.

 Revenue of transmission companies shall be determined by using “revenue cap” method.

 Is being determined since January, 2003.

 The current transmission price is calculated according to entry-exit system.Transmission tariff comprises capacity and service charges;

Separate ‘Entry’ capacity tariffs for each entry point into the country. 0,011 Euro/MJ/d for Entry-1 in Feb. 2012 A single ‘Exit’ capacity tariff which recovers the costs of the ‘Socialized’ section of the network (additionaly there is a single export exit capacity tariff); 0,18 Euro/MJ/d for Exit in Feb. 2012 A commodity tariff that recovers the operating costs of the network.

Okan YARDIMCI 0,20 Euro/GJ in Feb. 2012 Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Entry exit zones

Malkoçlar Entry 5: Entry 1 Entry 3: Entry 8: Türkgözü Entry 7: Durusu Export Point TPAO Akçakoca (Azerbaijan) (Greece) TPAO Storage (Blue Stream) (Production) M. Ereğlisi (LNG) Entry 9: TEMİ Entry 2 Edirne (Production)

EXIT Entry-4 Entry 6 Bazargan Egegaz (Iran) (LNG)

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Transmission & dispatch control tariff

Step 1: Calculate the Revenue Step 2: Forecast Capacity Req. Requirements We calculate the Rate Base * To calculate capacity tariffs, (including linepack) from historic and estimates of the amount of capacity future capital expenditure. booked by suppliers are necessary. Depreciation and return on the Rate Base must be recovered by capacity charges. Step 4: Calculate Commodity Step 3: Calculate Capacity Tariffs Tariffs Capacity tariffs are set so that, given Commodity tariffs are set to recover the forecasts of booked capacity, the operating costs of transporting gas. Transporter fully recovers fixed costs.

*The RAB value has been determined through the revaluation of operating assets based on the historic cost, straight line depreciation (22 years), evaluated by inflation. Assets related to unregulated businesses are excluded.

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Transmission & dispatch control tariff

+ +

OPEX Depreciation Return Revenue Requirement (RR)

Commodity charge Capacity charge (around 35% of RR) (around 65% of RR) In 2011-2013 period; ideal case transition period RR X 0,65 = Commodity RR X 0,35 = Capacity Tariff periods

Before 2004 (less than 1 year periods)

2005-2010 (1 year periods)

2011-2013 (3 years period)

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Transmission & dispatch control tariff

Dispatch Control tariffs have been defined in the relevant Regulation as follows;

 Imbalance fee difference between entry – exit amounts  Disorder fee difference between program & actual amounts  Excess capacity charges shipper pays in excess of capacity reservation  Interruption balancing charges inaccurate shipper pays for the other shipper in case of interruption  Service interruption charges transmission company pays for the service interruption

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Storage tariff

BOTAŞ Marmara Ereğlisi LNG Terminal Yearly Send-Out Capacity : 8.2 Billion m3 (Tank Capacity; 3 X 85.000 m3 LNG tanks) Daily Maximum Sent Out : 18.7 million m3/day

LONG TERM CONTRACT BETWEEN TPAO&BOTAŞ FOR 2,1 BCM

EGEGAZ Aliağa LNG Terrminal Yearly Send-Out Capacity : 6.0 Billion m3 (Tank Capacity; 2 X 140.000 m3 LNG tanks) Daily Maximum Sent Out : 16.4 million m3/day

Underground Storage Storage tariff is being determined by the Board since January, 2003 LNG Gsification Terminals Planning Natural Gas Underground Storage Until the storage capacity in the country reaches a sufficient level, storage prices shall be determined by the Board Planning LNG Gasification Terminals Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Storage tariff

Capacity charge (yearly capacity allocation from send-out)

0,30 Euro/GJ in Feb. 2013

Commodity charge (for the amount of send-out)

0,07 Euro/GJ in Feb. 2013

Storage charge (for the amount of stored gas per day)

0,01 Euro/GJ/day in Feb. 2013

 The current storage price is been updated every month depending on the change in the inflation rate.

Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Draft tariff methodology

Duration of tariff; 3-10 years

Minimum WACC; 10%+inflation

Draft of the natural gas amendment law; exemption of the third party access till 2025 for Depreciation; 15 years-linear the new LNG terminals Okan YARDIMCI Price Regulation of the Natural Gas Sector in Turkey ERRA Training Course : Price Regulation & Tariffs 05 – 08 March 2013, Budapest Connection tariff

Connection Tariffs of Non-Eligible Consumers: 135 Euro (including connection line + metering) ***

Connection Tariffs of Eligible Consumers: • The fees shall be freely determined by the parties within the framework of the principles. • For construction of connection line, eligible consumers have right to choose the firm among certificated companies or the relevant distribution company.

*** actual cost is less than 135 Euro the excess gain is taken into account in the distribution tariff!!!