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ERRA Secretariat • II. János Pál pápa tér 7., 1081 Budapest
Tel.: +36 1 477 0456 • E-mail: [email protected] • Web: www.erranet.org
FINAL REPORT ERRA MEMBER-TO-MEMBER PROJECTS
2016
Name of Project: Twinning Project in the framework of Ad Hoc Energy Regulators Regional Association
(ERRA) member projects.
Organization(s): EMRA (Energy Market Regulatory Authority of Turkey) and ERC (Energy Regulatory
Commission of the Republic of Macedonia)
Name and position
of main contact:
Mustafa YILMAZ, Energy Expert, EMRA,TURKEY
Andrijana NELKOVA-CHUCHUK, Deputy Head of Economic Department, ERC,
MACEDONIA
Email address: [email protected]
Timeframe of Project: 28 March-01 April 2016 Skopje, Macedonia
02 - 06 May 2016 Ankara, Turkey
Total Budget: 2095,49 EURO for Turkish Team in Skopje
2600,00 EURO for Macedonian Team in Ankara
Contents
1. TOPICS DISCUSSED..................................................................................................................................... 2
2. LESSONS LEARNED ..................................................................................................................................... 5
3. POSSIBLE IMPACTS .................................................................................................................................... 7
4. OTHER CONCLUSIONS ............................................................................................................................... 8
5. RECOMMENDATIONS ................................................................................................................................ 8
Appendix 1: agenda and participants of the program ...................................................................................... 9
Appendix 2: Photos of activities ...................................................................................................................... 16
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ERRA Secretariat • II. János Pál pápa tér 7., 1081 Budapest
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1. TOPICS DISCUSSED
a) Specific Issues
1- Investement Costs In Natural Gas Market
In Macedonia one of the greatest challenges in developing Natural Gas Market is how to
deal with the high costs of new investments, which with the risk of low capacity usage result in
significant increase in the TSO and DSOs tariffs for final consumers. At the same time the
investment costs per unit can vary from one operator to another.
In this section of discussions ERC and EMRA experts made presentations that aimed to
introduce natural gas market structures, main players and their tariff methodologies. Especially
Turkish team tried to explain about their auction procedures of natural gas distribution facilities in
the past and how they dealt with tariff issues. Sharing the Turkish experience with development of
the natural gas distribution networks is of significant importance for Macedonia, in this early stage
of development of natural gas distribution networks in the country.
2- Loss target rates for Distribution Companies in Electricty Market
In Turkey all the Electricity DSO’s are privatized and the privatization completed in 2013.
The 2011-2015 was the second tariff period for Electricity DSO’s and during this period there were
numerous lessons learned both for DSO’s, as well as for EMRA. One of the key results reached
during this period was establishing realistic loss target rates for the DSO’s. In the period 2011-2015
EMRA imposed gradual implementation of reduced loss target rates for DSO’s, which was opposed
to the regulatory practice of static loss target rates implemented in the previous years. But at the end
of the day it was understood that the imposed targets or the ideas of EMRA are not feasible and are
not matching the reality of the existing electricity grid’s features. For the following 2016-2020 tariff
period EMRA developed a dynamic model for loss target rates and this Methodology could be an
example of a good practice which eventually can be applied in Macedonia as well.
Until 2011, ERC approved distribution loss rate no higher than 11%. There is one electricity
DSO in Macedonia, covering almost the whole territory of the country, and one small DSO in
Skopje, seated in one of the industrial parts of the city. With the Energy Law from 2011, dynamic
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ERRA Secretariat • II. János Pál pápa tér 7., 1081 Budapest
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plan for reducing the network losses (both transmission and distribution losses) was introduced, and
consequently it was applied in the Methodologies for electricity tariffs. Since 2011, electricity
companies submit a Plan for network losses reduction to ERC for approval. Introduction of the plan
for losses reduction made results in the Macedonian distribution company and the actual losses are
decreasing year by year. This regulatory practice can be good example for other countries facing the
issues of network losses approval.
In this part of the project experts from both ERRA and ERC made presentations about their
methodology and teams tried to evaluate the advantages and disadvanteges of their methodologies.
3- Weighted Average Cost of Capital (WACC) Calculation
It is well known that the companies have different sources of finance, such as common
stock, retained earnings, preferred stock and debt. Weighted average cost of capital (WACC) is
used to calculate the average rate of return a company expects to compensate all its different
investors. Generally it is calculated by multiplying the cost of each source of finance by the relevant
weight and summing the products up. The WACC rate is very important for the regulated
companies in both Electricity and Natural Gas Markets. Because it is the main way to make money
and profit for the regulated companies through their investments, calculating WACC rate is a
technical issue and it needs some historical and reliable data for the countries. All countries have
different inflation rates, interest rates, currency exchange rates and different economic indicators.
Even WACC has an universal formula it is very hard to find, define and use the relevant data in the
WACC formula for developing countries like Macedonia and Turkey.
In this part of the project expert teams from both NRA’s delivered presentations about their
methodologies to find relevant data for WACC calculation.
b) General Issues
1- General Structures of Regulatory Bodies
One of the general purpose of a twinning project is to share good regulatory practices in
ERRA member countries. Even it is not a specific part of this project due to the high level
participation of the project, both countries made presentations about the legal status,
organisational structure, relations with ministry or parliament, decision making process,
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responsibilities, etc. of their organisations. This part of the project was very remarkable for
Chairmans, Vice Chairmans and Board Members of the organisations.
2- General Tariff Setting Structures
To learn deeply about the specific topics of the project both teams from the organisations
made presentations about their electricity and natural gas tariff structures. These tariff structures
were mainly about the number of companies, financial tables of companies, benchmarking
analyses of companies, length of tariff periods, effects of WACC and loss targets on their tariffs,
price making structures in day ahead market and intra day markets etc.
Both teams had the opportunity to learn how the specifics of the markets influence the applied
methodologies and vice versa.
3- General Market Structures
In order to learn deeply about the specisific topics of the project, both countries made
presentations mainly about the historical backgroung of their markets. Countries made
presentations about how they unbundled their vertical integrated systems on the historical basis.
They talked about their aims and expectations and where they are now. As a part of the project,
they made presentation about the future expectations as a regulator from their markets for both
private companies and consumer rights perspective. Even it is not a specific topic of the project
regulators made presentations about their petroleum markets too. Also, as a highlihted issue
between all ERRA member countries, both countries tried to explain their feed-in tariff
structures in the electricity market.
4-Study Visits
Regarding with the project, both teams made some field visits. In Macedonia, both teams
visited a hydro power plant and learned about its role in the market. This HPP is responsible for
the black start of the Macedonian electro system. The teams also visted EVN Macedonia, the
private electricity distribution company of Macedonia. In Ankara teams visited the Associations
of Distribution Companies for Electricity (ELDER) and Natural Gas (GAZ-BIR) seperately.
Also teams visited the private electricity distribution company of Ankara. For a courtesy visit,
teams visited the ex ERRA Chairman Alparslan BAYRAKTAR for his new position in the
Ministry of Energy and Natural Resources of Turkey.
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ERRA Secretariat • II. János Pál pápa tér 7., 1081 Budapest
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2. LESSONS LEARNED
For the specific issues discussed between the teams;
Investement Costs In Natural Gas Market; Macedonian team deeply learned the natural gas
tariffs and how Turkey dealt with new investments influence in the tariffs. From Turkish
experience, to set a fix consumer connection fee to reduce the effects of new investments for tariffs
can be applied. In Turkey, there is a definition of „distribution region” and all the consumers in this
region are paying a distribution fee even they are connected to the transmission line, since the
operator of the region and the connection points is the distribution company. From this perpective
the industiral users, central heating power plants or electricity generators using natural gas can pay
the distribution fee to reduce the high increases in tariffs for the consumers. Also, increasing the
depreciation period will reduce the effects of new investments in the network and the investor will
be satisfied with this solution since it will get WACC for this long time period.
Loss target rates for Distribution Companies in Electricty Market; Turkey and
Macedonia learnt their approaches to set the loss target rates for distribution companies in
Electricity Market. Both countries have different approaches than each other and each has different
advantages and disadvantages. From Macedonian experience a static and fixed rates are applied but
on the other side Turkey has flexible and unsteady loss target approach for each year. Advantage
and disadvantages of these two different approaches are summarised in the below chart.
ADVANTAGES DISADVANTAGES
MACEDONIAN METHODOLOY -More compulsive for the
distribution companies to
reduce the losses in grid
-More appropriate for a
long term planning for
both regulators and
distribution companies
- The target for reduction of
losses for the first year of the
plan is set on real figures for
the network losses
-ERC can change the
methodology and the losses
reduction plan in any time
-Sometimes the real world
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ERRA Secretariat • II. János Pál pápa tér 7., 1081 Budapest
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-More appropriate for
general regulation
methodology
and methodology are not
matching each other
TURKISH METHODOLOGY -More realistic. Because
calculations are based on
past real loss target rates
-Easy to understand and
apply because there is no
need to make a calculation
on technical losses. All
countries can apply it
easily.
-Still compulsive for the
companies to reduce the
losses on grid
- Target rate of a specific year
can be bigger than the
realisation of a past year.
-Needs more explanation for
society and media
-Every year the regulator
should make new calculations
The teams decided to evaluate these different approaches for their future analyses in their
country applications.
Weighted Average Cost of Capital (WACC) Calculation; in this project we learnt that
Macedonia is using only their domestic financial data to calculate WACC but on the other side
Turkey is using domestic financial data, harmonised with the United States of America and
European Union financial data. According to the tariff rule book this is mandatory for Macedonia
but Turkey has a more flexible rule book for the agency to use in WACC calculation. For the future
applications, Macedonia can change the rule book and use data of developed countries which has
more reliable and longer period financial data.
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ERRA Secretariat • II. János Pál pápa tér 7., 1081 Budapest
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3. POSSIBLE IMPACTS
Overall impact of the project is to strengthen the capacities of the expert teams of EMRA
and ERC on the specific topics of interest, as well as generally establish a stronger base for further
cooperation between ERRA member countries. Possible Impacts of the project can be written as
below;
1. Delivering Analysis whether the Turkish approach and methodology used for dealing with
natural gas investments can be applied in the Macedonian case. Actually these methods can
be used as well as in other countries from the region which are in the initial phases of
developing natural gas market (Albania, Kosovo, Montenegro, Bosnia and Herzegovina,
etc.).
2. Delivering documents which will include lessons learned from Turkey and Macedonia in
setting up loss target rates with comparison analysis of both specific approaches and
eventual recommendations for further improvement of regulatory practices.
3. The return on the invested capital (WACC) is of utmost interest of the owners of the private
companies and on the other side, maybe the most sensitive issue in the tariff/price
regulation. Delivering document which will include comparison of EMRA and ERC
experience in calculating WACC rates for the TSO’s and DSO’s in the Electricity and
Natural Gas Markets, aimed at increasing knowledge and experience for this specific
technical issue.
4. This project will be presented in committee meetings and it will encourage other member
countries for joint works and to share their practices with other member countries. Also, the
results of this project can be applied for other countries in the neighbourhood of Macedonia.
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ERRA Secretariat • II. János Pál pápa tér 7., 1081 Budapest
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4. OTHER CONCLUSIONS
The project was established as a twinning project but we discussed not only the specific issues
but also the many general issues about market structures, legal frameworks of authorities and etc.
This project was a great oppurtunity for countries and their staff to meet with each other and also to
learn many issues from an another agency. Both chairmans of the regulatory agencies supported the
project and for near future Turkey is planning one more study visit to Macedonia and neighborhood
countries of Macedonia.
5. RECOMMENDATIONS
This twinning project in the framework of Ad Hoc Energy Regulators Regional Association
(ERRA) member projects involved two national energy regulatory authorites (ERC and
EMRA), however topics discussed during the meetings may be also relevant for other regulators
especially neighborhood countries of Macedonia. Also presenting this project in General
Assembly of ERRA and in other committee meetings will increase the active participation of
ERRA member countries. We strengthly recommend ERRA to support this kind of projects to
share good regulatory practices in member countries, to enhance member-to-member
collaboration and to develop regulatory capacities of individual regulators.
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ERRA Secretariat • II. János Pál pápa tér 7., 1081 Budapest
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Appendix 1: Agenda and participants of the program
ENERGY REGULATORY COMMISSION OF THE REPUBLIC OF MACEDONIA
List of Participants
ENERGY MARKET REGULATORY AUTHORITY OF TURKEY (EMRA)
www.epdk.org.tr
Mustafa YILMAZ- Energy Expert-Tariff Department-PROJECT LEADER
Mehmet ERTÜRK- Vice Chairman of EMRA
Hasan ALMA – Tariff Department Head
Nedim KORKUTATA- Group Head- Tariff Department
Ahmet ÖZKAYA- Energy Expert-Tariff Department
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ENERGY REGULATORY COMMISSION OF THE REPUBLIC OF MACEDONIA (ERC)
http://www.erc.org.mk/
Andrijana NELKOVA-CHUCHUK- Deputy Head of Economic Department, PROJECT LEADER
Dimitar Petrov - President of ERC Macedonia
Marko Bislimoski – Head of Electricity Department
Shamil Redzepi – Advisor at Economic Department
Dalibor Mitrovski – Advisor at Technical Department for Natural gas, Liquid fuels and District
Heating
Program Agenda
March 28, 2016
10:00 Welcoming remarks and opening
- Mr. Dimitar Petrov, President of ERC Macedonia
- Mr. Mehmet ERTÜRK, EMRA Turkey, Vice Chairman
- Mr. Mustafa Yilmaz, EMRA Turkey, Team leader
- Ms. Andrijana Nelkova-Chuchuk, ERC Macedonia, Team leader
10:30 Energy Regulatory Commission of the Republic of Macedonia, organization and
responsibilities
- Mr. Shamil Redzepi, Advisor at Economic Department
11:00 Energy Markets Regulatory Authority, Turkey, organization and responsibilities
- Mr. Mehmet ERTÜRK, EMRA Turkey, Vice Chairman
11:30 Coffee break
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12:00 Natural gas market in the Republic of Macedonia, Investment cost in natural gas
market
- Mr. Dalibor Mitrovski, Advisor at Department for Natural gas, Liquid fuels
and District heating
- Discussion
13:00 Snack
14:00 Natural gas market in Turkey, Investment cost in natural gas market
- Mr. Nedim KORKUTATA EMRA Turkey, Group Head
- Ahmet ÖZKAYA EMRA Turkey, Energy Expert
- Discussion
15:00 Conclusion of the day
15:30 Lunch
March 29, 2016
09:30 Electricity market structure in the Republic of Macedonia and Loss target rates
for DSO in Electricity markets, Macedonian experience
- Mr. Marko Bislimoski, Head of Electricity Department
- Discussion
10:30 Coffee break
11:00 Electricity market structure in Turkey and Loss target rates for DSO in Electricity
markets, Turkish experience
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- Mr. Mustafa YILMAZ, EMRA Turkey, Energy Expert
- Discussion
12:00 Snack
13:00 Visit of EVN Customer relations Center in Skopje, EVN AG Macedonia
15:00 Visit of EVN Dispatching Center
16:00 Lunch
March 30, 2016
09:00 General tariff structure in Electricity and Natural gas markets in Macedonia
Calculation of WACC, Macedonian experience
- Ms. Andrijana Nelkova-Chuchuk, Deputy head of Economic Department
- Mr. Marko Bislimoski, Head of Electricity Department
- Discussion
10:00 Coffee break
10:15 General tariff structure in Electricity and Natural gas market in Turkey
Calculation of WACC, Turkish experience
- Mr. Hasan ALMA, EMRA Turkey, Department Head at the Tariff
Department
- Mr. Nedim KORKUTATA EMRA Turkey, Group Head
- Discussion
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11:15 Snack
- Departure to Gostivar, Visit to HPP Vrutok
March 31, 2016
09:30 Preparations for drafting final documents
10:30 Conclusions, recommendations and closure
11:00 Guided tour in Skopje
May 2, 2016
16:00 Meeting at Ankara Esenboğa Airport
17:00 Arrival to hotel and dinner
May 3, 2016
09:45 Welcoming of ERC Delegation by President Mustafa YILMAZ
10:15 Meeting with Vice Chairman Mehmet ERTÜRK
11:00 Introduction of the twinning project for EMRA staff (Andrijana and Mustafa
YILMAZ)
12:00 Lunch
13:00 Study visit to ENERJISA (Distribution Company) (Including a presentation by
ERC about her structure and electricity market of Macedonia with investment
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opportunities max 30 min)
16:30 Organized wholesale market structure in Turkish Electricity Sector (Fatih
Teoman KAYA)
17:30 Conclusion of the day
19:00 Welcome dinner hosted by President Mustafa YILMAZ
May 4, 2016
10:00 General outlook of Turkish Petroleum Market (Mustafa Çağrı PEKER)
10:45 Break
11:00 Tariffs and price setting in Turkish Petroleum Market (Mustafa DÜZGÜN)
12:00 Study visit to ELDER (Association of Electricity Distribution Companies)
(Including a presentation by ERC about her structure and electricity market of
Macedonia with investment opportunities max 30 min)
14:45 Renewable support mechanism in Turkish Electricity Market (İbrahim Ethem
ERTEN)
15:45 Efficiency parameter application in tariffs-Data Envelopment Analysis-Turkish
Experience (Gözde İŞLER- Nedim KORKUTATA)
16:15 Ankara tour - free time
May 5, 2016
09:45 General outlook of Natural gas market in Turkey - Natural gas Market
Department
10:30 Break
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11:00 Study visit to GAZBİR (Association of Natural Gas Distribution Companies)
(Including a presentation by ERC about her structure and natural gas market of
Macedonia with investment opportunities max 30 min)
14:30 New investments in natural gas market, managing tariffs and connection
charges (Serkan ŞEN - Mehmet KÜRKÇÜ)
15:30 Ankara tour - free time
May 6, 2016
11:00 Meeting at the hotel to go Ankara Esenboğa Airport
Appendix 2: Photos of activities
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