Prepared by:
MERCADOS - ENERGY MARKETS INTERNATIONAL
August 2010
MERCADOS EMI
ASSESsMENT OF OPTIONS FOR IMPROVING THE OPERATIONal EFFECTIVENESS OF TEİAŞ
EXECUTIVE SUMMARY
1INTRODUCTION
2Background on the TURKISH ELECTRICITY MARKET
3Theoretical framework
3.1the introduction of a market operator
3.2institutional framework for state-owned enterprises
4Assessment of TEİAŞ current situation
4.1inception of a day-ahead market
4.2institutional framework
5International experience
5.1market operators
5.2transmission system operators Ownership and governance
6options
6.1the introduction of a market operator
6.2institutional arrangements for TEİAŞ
EXECUTIVE SUMMARY
The World Bank has asked Mercados - Energy Markets International to:
- review the current legislative, institutional and governance framework within which TEİAŞ operates;
- identity its adequacy for the growing mandate that TEİAŞ is responsible for, as well as the enhancements that may be needed to enable TEİAŞ to better respond to its increasingly complex mandate, and
- based on similar international experience, options available for strengthening its operational effectiveness and financial viability.
The Turkish electricity sector has experienced important restructuring over the last decade, and further changes are foreseen in the coming years. The sector has made its way from a state-owned vertically integrated structure to an unbundled, competitive setting. TEİAŞ, as the transmission, system and market operator is the backbone of the electricity sector in Turkey. The operational effectivenessand efficiencyof TEİAŞ is fundamental for the success of the entire restructuring process.
We have reviewed the institutional options for introducing a day-ahead market operator in Turkey because of TEİAŞ’ current role as market operator. We have drawn some recommendations.
We have also analysed the governance framework within which TEİAŞ operates. We have found that although there are no indications that TEİAŞhas not managed so far to develop its activities adequately, the current institutional framework may limit TEİAŞ capacity to meetthe challenges of its role in a liberalised electricity sector in the future.
We have drawn our recommendations on changes to the institutional framework of TEİAŞ contemplating three possible scenarios:
- amendments to current institutional framework;
- the introduction of private monitoring in TEİAŞ performance;
- the creation of a specific framework for TEİAŞ.
The recommendations for any of these scenarios are guided by four principles: adapt the legal framework to current necessities, create a governance structure to protect the Company from external interference, enhance the incentive for managers’ performance, and put in place compliance arrangements.
Ourrecommendationsfor the creation of a specific framework for TEİAŞ irrespective of its ownership include:
- further unbundling of functions within TEİAŞ;
- State ownership rights in the company should be represented by the Members of the Board of Directors. The Board may also include stakeholders’ representatives;
- members of the Board of Directors, including the Chairman, should be different from the General Management;
- the Chairman of the Board of Directors should be accountable to Parliamentin respect of TEİAŞ objectives and functions;
- the Chief Executive Officer should be appointed by the Board of Directors;
- introduction of an advisory Stakeholders Committee;
- autonomy of the staff and the management of TEİAŞ;
- Governmental instructions or guidelines should be made in writing to the Board of Directors and published;
- impose the same financial reporting obligations as to listed companies and external auditing by a private auditing firm;
- establishment of a compliance programme with the stated objective.
1INTRODUCTION
TEİAŞ is the Turkish Electricity Transmission Company. It is owned by the TurkishState, is considered a State Economic Enterprise under the rule of the Decree Law No. 233 on State Economic Enterprises and is subject to its provisions. At present, TEİAŞ performs the functions of transmission operation, system operation and market operation under the current structure of the electricity market in Turkey. Takentogether, these functions turn TEİAŞ into the backbone of the Turkish electricity system.
As transmission operator,TEİAŞ is responsible for the planning, construction, operation, and maintenance of the high voltage transmission network. As system operator, TEİAŞ is also responsible for the dispatch, frequency control, real-time monitoring of the system reliability, and balancing of the demand and supply in the system. Finally, inits capacity as market operator, it oversees the wholesale market, as well as being responsible for market settlement, and is preparing thelaunchingof a day-ahead market due to start operations in 2011.
TEİAŞ' mandate therefore is central to ensuring electricity supply security and reliability, continued private investment in the electricity sector, and continued enhancements in grid operations which support the penetration of climate-friendly technologies such as renewables.
In order for TEİAŞ to be able to continue to manage its increasingly complex and strategic role in the electricity sector, TEİAŞ may need enhanced operational strength over key institutional aspects as well as enhanced overall governance of the sector. In an increasingly privatised and competitive electricity sector, there is a growing need for greater effectiveness and efficiency in many of the tasks performed by TEİAŞ — engineering, planning, finance, and perhaps most importantly, market operation. TEİAŞ needs to be able to recruit and retain adequately skilled staff, manage its transmission strengthening investments in a timely and well-planned and coordinated way, and manage effectively its commercial operations.
The World Bank has asked Mercados - Energy Markets International (Mercados EMI) to:
- review the current legislative, institutional and governance framework within which TEİAŞ operates;
- identity its adequacy for the growing mandate that TEİAŞ is responsible for, as well as the enhancements that may be needed to enable TEİAŞ to better respond to its increasingly complex mandate, and
- based on similar international experience, options available for strengthening its operational effectiveness and financial viability. The options would expect to be drawn from the experience of other successful transmission companies in the world, with a view to determining which model will suit the Turkish legislative, regulatory and utility governance environment most optimally.
The required assessment does not however extend to propose an internal organisation of the Company. Instead, recommendations will be given on how to improve effectiveness through enhanced governance arrangements.
2Background on the TURKISH ELECTRICITY MARKET
In 1996 Turkeyembarked in an electricity sector reform programme that aimed to establish a competitive electricity market with the goal to increase private investment and participation, improve supply- and demand-side efficiency, and ensure energy supply security in an environmentally sustainable manner.
In 2001, the Government passed the Electricity Market Law (Law 4628) which split the existing public companies - a generation and transmission company (TEAŞ) and a distribution company (TEDAŞ) - into three companies: TEIAS, the Turkish Electricity Transmission Company, TETAŞ, the Turkish Electricity Trading and Contracting Company, and EUAS, the Electricity Generating Company.
It also established the Electricity Market Regulatory Agency (EMRA), as an independent regulatory commission which regulates the performance of sector entities and oversees pricing. In 2006, a competitive wholesale market was established in the form of a balancing market. Since its inception, the balancing market has been growing rapidly. Currently, more than 200 private companies are participating in power trading, through which more than 18% of the daily electricity supply is dispatched.
Figure 1 – Development of Turkey’s electricity market
The wholesale power market is currently based on bilateral contracts coupled with a balancing market. Submission of generation and consumption schedules and of bids for the balancing market take place the day ahead of delivery, although a proper day-ahead spot market will soon be introduced (scheduled by the start of 2011).
Figure 2 – Stages of the Turkish electricity market
In April 2009 a new version of the Balancing and Settlement Regulation (BSR) came into force, introducing some changes in market operation: balance responsibility, hourly settlement, demand side participation, separation of balancing market, and collateral system. The new BSR has meanta gradual move towards the standards of markets organisation which are now common in the most advanced jurisdictions in Europe. The establishment of a proper day-ahead market will provide an additional, important component of this “modern” market design[1].
3Theoretical framework
This section presents the analytical framework we have used to look into the two aspects which are the main focus of the analysis:
- options for the institutional implications of the introduction of a day-ahead market in Turkey;
- suitability of the current institutional framework for TEİAŞ, as a State-owned company, for the support of a competitive electricity market in Turkey.
The framework presented in this section, together with the results of the review of some relevant international (European) experience presented in Section 5, will be used to assess the current situation of TEİAŞ and to provide the required recommendations
As a starting point it is useful to recognise that the main objective of a Transmission System Operator (TSO) - i.e. an entity which owns and operates the transmission network, as well as operating the electricity system[2] – is to operate, maintain and develop the transmission system in a specified geographical area (usually referred to the “control area”), and its interconnections. This is the primary mission which should be assigned to a TSO; the suitability of the governance structure and the pros and cons of assigning other tasks to the TSO should be assessed against this mission.
3.1the introduction of a market operator
The concept and notion of “market operation” and “market operator” (MO) have been used in the electricity sector to denote two different, and to some extent complementary set of activities, which in a way are reflected in the current developments in Turkey.
On the one hand, and more traditionally, market operation has consisted in the settlement of deviations between scheduled and actual injections into and withdrawal from the grid or of imbalances between injections and withdrawals; and in some cases in the determination of these deviations. In many jurisdictions this activity is considered as part of the operation of the system and therefore carried out by the System Operator, as it is the dual role to system balancing - where the System Operator maintains the system in balance, in the face of deviations/imbalances of actual injections and withdrawals. However, it is not uncommon for such activity to be performed by a “market operator”. This is, in essence, the “market operator” function currently carried out by TEİAŞ.
However, more recently (since the mid-1990’s) a different notion of MO has developed in relation to the spreading of day-ahead and intra-day electricity markets - and, sometimes, longer-term markets as well. In these markets, generators and suppliers, as well as large consumers, sell and buy electricity to/from one another (and not only to/from the SO, as in the case of balancing markets). These markets are also referred to as Power Exchanges (PX) and now are a typical feature on European liberalised electricity sectors. The term Power Exchange is also used to designate the operators of such markets. This is the type of role which TEİAŞis expected to play in the future, with the establishment of a day-ahead electricity market in Turkey.
Therefore, and more generally, the market set-up of a liberalised electricity sector can include different components:
a)a deviation/imbalance calculation and settlement function, as mentioned above;
b)a balancing market, where the SO procures the resources (energy) required to balance the system in real time. The prices/remuneration defined in the balancing market usually determine the imbalance charges applied to settle deviations as part of the settlement function;
c)(other) ancillary services markets, such as markets for secondary and tertiary reserve, for reactive power of for black-start capability. These market can operate in the short or long term;
d)registration of bilateral contracts, for statistical, regulatory or congestion management purposes;
e)day-ahead and intra-day markets, or power exchanges, as mentioned above;
f)longer-term electricity market, based on physical or financial contracts, with physical delivery or cash settlement;
g)clearing of bilateral contracts, where an entity interposes itself as a central counterparty between the seller and the buyer in a bilateral contract, taking over the counterparty risk.
Figure 3 presents a “timeline structure” of most of these different functions (and others which are related to them).
Figure 3 – Relation between market products and market timing
These different components are allocated between the SO and the MO/PX, even though there is no single rule and practice for this allocation. While it is clear that the management of the day-ahead and longer-term markets is a typical MO/PX function, the assignment of responsibilities for registration of bilateral contracts, deviation/imbalance settlement and the running of balancing and ancillary services markets is less obvious. In theory, such assignment should respond to a number of criteria, including:
-coordination, i.e. the advantage arising from one function being carried out by the same entity which performs, statutorily, closely related functions, which in this way can be more easily coordinated;
-effectiveness, i.e. the advantage arising from one function being carried out by the same entity which has more readily and timely access to the information required for its efficient performance. In this respect, functions which are related to the real time operation of the sector – for which the SO is responsible - may typically be more efficiently carried out by the SO;
-neutrality, i.e. the advantage arising from a function being performed by an entity which is not involved, and in fact has no direct commercial interest, in the outcome of the function.
Table 1 illustrates an allocation of functions between the SO and the MO/PX which could result from the application of the above criteria.
Table 1 – Possible allocation of functions between SO and MO/PX
Functions / Proposed entity / Criteriaa)Calculation and settlement of deviations / SO / Cooperation (w.r.t. metering data management), effectiveness
b)Balancing market / SO
(but MO can organise and operate it on behalf of the SO) / Effectiveness, cooperation
c)Ancillary services market / SO / Effectiveness
d)Registration of bilateral contracts / SO
(MO if for congestion management purposes and congestion is managed on the market) / Cooperation (w.r.t. management of power flows on the network)
e)Day-ahead and intra-day markets / MO/PX / Statutorily, neutrality
f)Longer-term electricity market / MO/PX / Statutorily
g)Clearing of bilateral contracts / MO/PX
(through a clearing house) / Cooperation (w.r.t. clearing of day-ahead and intra-day market trading)
The most innovative feature in the near future of the organisation of the electricity sector in Turkey is the establishment of a day-ahead market. It is therefore worth considering this specific aspect of market operation is greater details. The European experience in establishing Power Exchanges is presented in Section 5.1.
3.2institutional framework for state-owned enterprises
There may be several reasons why governments want to keep the ownership over some companies: from socialand economic tostrategic interest motivations (or a mix of them). Ownership gives a higher level of control than any other form of monitoring, such as limitation of activities or economic regulation, especially in the case of unforeseeable events.
Governance challenges faced by state-owned enterprises differ slightly from those of private companies, because they are (normally) protected from takeovers and the risk of bankruptcy. State-owned enterprises may also suffer just as much from undue hands-on and politically motivated ownership interference, as from totally passive or distant ownership by the state. There may also be a dilution of accountability[3].
Nevertheless, in exercising their ownership rights governments can beneficially use tools that are applicable to the private sector. We propose evaluating the governance framework of TEİAŞ against the prevailing framework in private companies. This will allow us to identify constraints and undue interferences in the way TEİAŞ carries out its activities, which may ultimately lead to TEİAŞ not been able to fulfil its mission. The next figure shows four steps in the process of setting up the governance structure.
Figure 4–Steps for efficient governance
Objective and functions
An effective legal and regulatory framework for state-owned enterprises is critically important. Public ownership may pursue several interests; some of them may be different from those of private investors, but those objectives should be clearly stated to guide management decisions and make accountability easier.
State ownership does not substitute the need for a proper regulatory regime, because the government objectivesmay diverge at times from the longer-term social optimum (e.g. when the government tries to limit tariffs to curb inflation, in this way depriving the company of financial resources for investments required to ensure the viability of the business in the longer term). In addition, an independent regulatory supervision on the company will prevent that other public objectives unrelated to the company functions be financed through the transmission tariffs, unless explicitly provided in legislation regulation[4].
A clear legal and regulatory framework, with established objectives and procedures would also help the company to compete in private financial markets for funds to finance company’s activities.
Alignment of managers to objective
Board members and managers should act in the best interest of the company and exercise their functions in order to achieve the company’s objective. This can be attained by giving them a clear mandate that they will be accountable for, and give them incentive – including monetary- if they manage to fulfil the objectives.
In practice, it is not easy to convert long-term corporate objectives into short term objective goals. This is especially true in companies where managerial actions do not have a direct impact on current operations but a durable impact on future company performance, such as in the case of developing the transmission network efficiently.