The “Regulatory Asset Base” expression was defined and established in 1990 in the United Kingdom to avoid financial difficulties of private companies who were in the energy business. It is now the time that this definition should be implemented into the local environment in Turkey to avoid possible bankruptcies. The Regulatory Asset Base (RAB) usually refers to the measure of the net value of a company’s regulated assets used in price regulation. It is used in calculating important elements of the revenue requirements (the basis for the tariff calculation), depreciation allowance and return on capital.
An important article was released by The Hurriyet Daily on 8 September titled “Growing Financial Difficulties of Private Companies in Local Energy Business”.
Let us read the first paragraph of that article:
“Companies have paid 21.1 billion USD for the privatization of electricity in Turkey since 2009. However, due to deteriorating economic indicators and extreme value increase in the USD with respect to the Turkish Lira, local companies are in a difficult financial situation in repaying their debts to lenders. Turkish private distribution companies are unable to pay their 7.7 billion USD debt, out of which 7 billion USD belongs to commercial banks. In the case of a collapse in the repayment of their debts to the electricity markets, havoc will occur in the banking sector.” Ref. Hurriyet 8-Sep- 2015
Electric distribution companies are in default due to the fact that their debts are in USD but their income is in Turkish lira, which has brought them to the point of bankruptcy. They have asked public sources to help them; however, there is a misinterpretation of the situation. There’s no crisis in this regard. There is a mismanagement and miscalculation of the financial sources of the private companies who were exposed to high debts.
These companies have exaggerated the incident when commenting, saying, “Contracts have been made in US dollars, but the collections were in Turkish Lira. The recent exchange rate differences brought financial difficulty.” Well, all contracts referenced were written in the tender documents upfront. There is no change later. The companies should make the calculations correctly to avoid such exposure to risk.
Markets regulate the private companies. Wisdom says that our private investors know best, so why didn’t these investors avoid the increase in prices before the cutthroat exchange rates were in place, and thus stop moving forward in the tender process? What was preventing them? In the past, our electricity market was owned and operated by public institutions. We used to have harsh criticism of public institutions. Contracts were not progressing properly, they were not completed on time, and they were completed incorrectly with progress lacking. Thus, plants could not be run well.
Because power plants, transmission, distribution, and retail all were in public ownership, they belonged to the public, to the nation, to us. They were as if ours in the end. We, Turkish citizens, saw them as our own property, we wanted them and hoped the best for them. Authorities in the public companies were our friends, they agreed with and accepted our criticism; they brought our feelings, writings, and solutions to their in-house meetings, and they tried their best to make the necessary upgrades.
Now the property has been passed to private investors. It is their property. We have no obligations, no responsibility, no care. They may operate or may not operate; they may shut it down if it is not profitable. If they cannot operate it properly and they lose money and go bankrupt and their property will be taken by the lending commercial bank and resold to another competent company. We have no obligation. So why are we entering such conversation? Why does the regulatory agency EMRA enter into the conversation?
If an electricity generation plant or an electricity distribution system cannot be operated efficiently, loses money or goes bankrupt, then the lending bank gets the ownership and can sell it again to another competent operator. There is nothing lost in the market. There is no need to interfere with the ongoing commercial events outside. We should leave the market forces to regulate the markets.
On the other hand, we do not know any news regarding the necessary rehab works that need to be done in the existing privatized power plants. Environmental exemption continues for the existing plants. Plants are operated at full capacity at their highest availability in order to get high cash income without spending much on necessary environmental equipment. Necessary electrostatic dust filter ESP upgrades and flue gas desulphurisation FGD purchases are ignored. There is almost no additional spending other than operation costs, fuel cost and employee salaries. Most of them have inadequate Ash dams.
We have now more than 70K MWe installed on the records but most of the public plants are not in operation. For example, 6 units out of 8 total in Afşin Elbistan are not in operation. Rehab investments are necessary for the privatized power plants, but such investments have not yet been made. Yet the investors are going bankrupt in their operation due to unplanned, inappropriate operation. Most of them are operating with an unqualified and inexperienced engineering capacity. Work barely goes ahead or, most of the time, they cannot go forward at all.
In fact, it was a completely wrong decision to privatize the former state power plants. Old power plants would have been run by the public until the end of their useful lives. Private investors would be required to set up a new plant. Existing natural monopolies cannot be open to competition. Investors may win but society will surely lose.
The Minister of Energy of the past government left his job to a new appointee until the snap elections, which are scheduled for 1 November. We had the opportunity to work with an experienced minister who came from the energy business in the past. Now, we are in transition period. If an investor cannot operate a plant or a distribution system, we should let the market forces regulate the plant and we should not interfere. In the meantime, we should learn more about “regulatory asset base” terminology in order to run the business better in the future.