1. Prepared by Barış EKDİ 1 Competition Law & Policy in Natural Gas Market Cengiz SOYSAL Coordinator of Dept. No. I csoysal@rekabet.gov.tr

2. Prepared by Barış EKDİ 2 Change in the Role of the Government Privatization Competition, Regulation/Deregulation/Re-regulation Emergence of the Independent Regulatory Agencies Turkish Competition Authority (TCA)1997 Energy Market Regulatory Authority (EMRA)2001 ISSUES IN THE TRANSITION TOWARDS LIBERALISATION ISSUES IN THE TRANSITION TOWARDS LIBERALISATION

3. Prepared by Barış EKDİ Change in the Role of the Government Emergence of the INDEPENDENT REGULATORY AGENCIES Change in the Role of the Government Emergence of the INDEPENDENT REGULATORY AGENCIES 3 State-owned enterprises PRIVATIZATION Private ownership Success of Liberalization Regulatory Governance INDEPENDENT REGULATORY AGENCIES

4. Prepared by Barış EKDİ 4 Good Regulatory Governance Competition Authorities and Sector Specific Regulators Clarity of roles : There should not be confusion between the functions of regulators and and objectives Ministries or other agencies. Accountability: legal system - ‘formal accountability’ about the decisions of the IRAs Participation: contribution of regulated industry, consumers and other related parties during regulatory process.

5. Prepared by Barış EKDİ 5 Good Regulatory Governance Competition Authorities and Sector Specific Regulators Transparency: Reasoning of decisions is important to reduce the risk of unfairness. Predictability: It is important to private investors to know that ‘the rule of the game’ will not change. Proportionality : The reason of the regulation (that is the market failure) and the level of regulation Autonomy : Administrative and financial (Risk of CAPTURE  Political Capture, Regulatory Capture, Self-Capture…)

6. Prepared by Barış EKDİ 6 Comparison between IRAs and Competition Authorities Goals/Objectives Basic Method or Approach Timing (ex ante vs. ex post) Frequency of Intervention Information Available Third Party Access - Çeaş Case (2002)

7. Prepared by Barış EKDİ – Restrictive Agreements, (Article 4, 5),(Article 4, 5), – Abuse of dominance (Article 6),(Article 6), and – mergers and acquisitions (Article 7).(Article 7). – And COMPETITION ADVOCACY » Natural Gas Sector Inquiry » Electricity Wholesale and Retail Markets Inquiry (Ongoing) 7 Scope of the Competition Act

8. Prepared by Barış EKDİ Natural Gas Sector Inquiry “Four Step Evolutionary Model” InfancyGrowth Development Maturity Time Demand / Infrustructure

9. Prepared by Barış EKDİ Infancy (0-15 years) Growth (15-20 years) Development (20-40 years) Maturity (40+ years) DEMAND STRUCTURE Initially, large-scale customers are served. Accelerated demand increase Demand is approaching to maturity Maturity in demand, Price is formed in the market in line with supply and demand curves. INFRASTRUCTURE State-owned vertically integrated monopoly. Expansion of the infrastructure by the state Sophisticated network management, infrastructure/network companies’ profit maximization requires optimization of the use of the network Sophisticated Network Code, flexible network. WHOLESALE MARKET Under State control as the rest of the industry. Low number of participants. Increase in the number of participant High number of participants; Increaseing customer eligibility, Increase in the churn ratio Reasonable profit margins (competitive level of prices), numerous market participants, Sophisticated financial and derivatives market, high levels of churn ratio. Natural Gas Industries and Liberalisation Process “Four Step Evolutionary Model”

10. Prepared by Barış EKDİ Evolution of Turkish Natural Gas Market Infancy stage : 1987 - 2001 Growth stage starts: 2001 - INFANCYGROWTH

11. Prepared by Barış EKDİ Issues Confronted in the Liberalization Process of Natural Gas Markets Competition in Wholesale Markets Horizontal competition Vertical integration/arrangements Regulatory Framework Regarding the Infrastructure Third Party Access Balancing Transparency Demand Structure Gas sales to the power plants Gas sales to the distribution utilities

12. Prepared by Barış EKDİ Developments in International Natural Gas Markets Conventional long-term contracts with take-or-pay obligations Establishing trade hubs Spot prices in price indexation (alongside oil-indexation) Liberalization of Natural Gas Wholesale Market

13. Prepared by Barış EKDİ Liberalization of Natural Gas Wholesale Market Horizontal Competition – Liberalization of imports – Opting out from contract release method EU Energy Commissioner Günther Oettinger The game of 'divide et impera' (divide and rule), or a game of this type proposed by Moscow cannot be and will not be accepted by EU member states – 2.5.2014 – Emphasizing gas release method – Concentrations and Joint Ventures (co-operation and concentration) Decision Prima-Enerco, 18.7.2013, 13-46/585-256 – Gazprom/Gazprombank – Coordinated effects of JVs Vertical Integration – Forward integration of the resource countries’ exporters Vitality of sector-specific regulations on the control of vertical integration until growth stage ends.

14. Prepared by Barış EKDİ Development of Natural Gas Markets in terms of Infrastructure Third Party Access – An efficient Exemption Regime for promoting ex novo entry (for Storage and LNG investments) Balancing – Completion of network stations investments by the distribution companies, related customers and BOTAŞ Sophisticated infrastructure and several market players Transparency – Data relating to network availability, generation and storage should be available in a non-discriminatory manner to ensure a level playing field – Ensure that no collusion takes place on the basis of the published information

15. Prepared by Barış EKDİ Development of Natural Gas Markets in terms of Demand Structure Gas sales to the power companies and large industrial customers Gas sales to the distribution utilities (small industrial and commercial customers, households)

16. Prepared by Barış EKDİ Consumption profile of power plants is different than the rest of gas customers Power plants can facilitate wholesale gas market development Pre-requisites: strong and flexible gas physical networks, more storage capacity, sophisticated financial and legal framework Interdependency between Gas and Electricity Markets

17. Prepared by Barış EKDİ Electricity Industry and Natural Gas Markets’ Development Power plants’ integration into gas industry (backward integration) Purchase Contracts between Power Plants and Gas Suppliers Duration Exclusivity Right of re-sales Interruptible vs. non-interruptible contracts

18. Prepared by Barış EKDİ Gas Sales to Distribution Utilities Balance: Competition vs. Consumer Protection The role of the state in retail pricing of gas Default supply / supplier of last resort practices and their improvement for more efficient retail markets