Ercüment Erdem Att. Tuna Colgar

Preliminary Licenses In The New Electricity Market Regulation

November 2013

Introduction

The new Electricity Market Law No. 6446 (“ the new EML” or “the Law”) entered into force by being approved in the Grand National Assembly of Turkey and by being published in the Official Gazette dated 30 March 2013 and numbered 28603. The waiting period occurred after the New EML has ended and the Electricity Market Licensing Regulation published in the Official Gazette, dated 4 August 2002 and numbered 24836, has been abolished by the Electricity Market Licensing Regulation (The “Regulation”), which entered into force through publication in the Official Gazette dated 2 November 2013 and numbered 28809.

In the present article, the concept of a preliminary license, which is one of the most important innovations brought by the New Electricity Market Regulation, will be examined.

The Regulation, consisting of sixty-three articles in total, includes all application, examination and evaluation, preliminary license and license processes. Furthermore, with 19 provisional articles included in the scope of the Regulation, its aim is to bring the current applications and the continuing transactions in line with the new Law.

As set forth under Article 2, this regulation covers the licenses and preliminary licenses required for operating in the electricity market, as well as key provisions, licensing procedures, and rights and obligations of license holding legal entities in relation to said licenses and preliminary licenses.

Pursuant to Article 5 of the Regulation, prior to commencing business, a legal person with intent to operate in the market has to obtain a license for each business and for each facility, if said business will conduct activities in more than one facility, with the exceptions set forth under this regulation. Depending on the connection point and physical state of the facility, the Energy Market Regulatory Board (“Board”) may consider units subject to more than one project under a single preliminary license or license. In this scope, it will be obligatory to obtain a compatible license for production, transmission, distribution, wholesale, retailing, importation, exportation and operating activities of electric energy at the electricity market.

In addition, pursuant to Article 8 of the Regulation, generation, organized industrial zone generation, transmission, market-operating, distribution license, organized industrial zone distribution and supply licenses can be obtained from the Energy Market Regulatory Authority (“EMRA” or “the Authority”) according to the activity type.

The Preliminary License and Its Application

The concept of a preliminary license, which is one of the most important innovations brought by the Electricity Market Law and the Regulation, brings essential changes and innovations to the electricity market in practice. The concept of a preliminary license was first regulated in Article 6 of the Electricity Market Law, which entered into force on 30 March 2013. However, secondary legislation was needed in order to make this concept actionable. The question of how preliminary licenses will be applied is set forth by the Regulation, which entered into force on 2 November 2013.

Pursuant to Article 5 Paragraph 2, a legal person engaging in electricity generation activities has to obtain separate preliminary licenses for each facility if it will carry out generation activities in more than one facility. However, renewable energy based generation facilities consisting of several structures and auxiliary buildings can be placed under a single preliminary license or generation license on the condition that they all connect to the system at the same point.

In Article 4/ (ff) of the Regulation, a preliminary license is defined as follows: “ A time specific permit issued to legal entities intending to conduct generation activities, for the purpose of obtaining required approvals, permissions, warrants, etc., in order to commence investments in generation facilities.”

Pursuant to the draft text of the Regulation, investors had to obtain all of the documents that were required to have a license before the Regulation entered into force in order to get a preliminary license. Considering said provision of the draft, the Ministry of Energy and Natural Resources expressed that this subject would lead to an incompatibility with the law; and other institutions in the sector, along with the Electricity Producers Association (EPA) which stated that such a large number of documents could not be obtained at the first step, and that the functionality sought in practice would be hindered. After giving due consideration to the aforementioned opinions, in the approved version of the Regulation, the provision on preliminary licenses was amended to make it more functional and convenient in practice. Pursuant to the Regulation, which was approved and has entered into force, it is not required to deliver all obligatory documents for a license while applying for a preliminary license; and the procedure for a preliminary license is simplified.

Therefore, production companies, which are subject to licensing and which will operate in the electricity market, will be subject to a preliminary license procedure before licensing, and will be obliged to apply for a preliminary license in accordance with the provisions foreseen in Art.12 of the Regulation.

Pursuant to Article 9 of the Regulation, the duration of a preliminary license cannot exceed twenty-four months, excluding force majeure conditions, and when a preliminary license is issued, matters regarding an extension of up to thirty-six months are regulated by the Board, depending on source type and installed capacity.

Pursuant to Article 12 paragraph 3 of the Regulation, legal entities subject to private law applying for a preliminary license with the intent to conduct activities in the electricity market have to be established as a joint stock or limited liability company as per the provisions of the Turkish Commercial Code No. 6102; or must have all of its shares other than those traded on the stock exchange according to the capital markets regulations registered if established as a joint stock company.

Also, pursuant to Paragraph 4 of the same Article, a legal entity or real or legal person(s) directly or indirectly owning a ten percent or more share, or a five percent or more share for publicly traded companies, in the legal entity and chairmen and members of the board of directors, including ones that resigned within the one year before the license cancellation, shall not be prohibited pursuant to paragraph 8 Article 5 of the Law.

Article 12 of the Regulation stipulates that legal entities demanding to be engaged in producing activities shall apply to the Board by providing “the letter of application” and all other required documents in order to obtain a preliminary license. With this provision it is foreseen that a letter of bank guarantee shall be submitted to the Authority in the amount set by the Board for each MW of installed capacity. The upper limit of the guarantee letter calculated by this method is set by the Board and cannot exceed five percent of total investment costs projected by the Authority for the generation facility.

During the preliminary license application, the articles of association of the applicant legal entity must be submitted; they should indicate that the company’s minimum capital has been raised to five percent of the total investment cost projected by the Authority for the generation facility, and to one percent for the construction of a nuclear energy based generation facility. Furthermore, there is a provision in the Regulation, which is likely to be perceived as an encouragement, which stipulates that only ten percent of the preliminary license application fee shall be collected from legal entities applying for preliminary licenses to set up generation facilities based on domestic natural resources or renewable energy sources.

Article 13 of the Regulation concerns the acceptance and review of preliminary license applications. Pursuant to this article, preliminary license applications will be reviewed within ten days, and where there is an inadequacy, it shall be required to be rectified within fifteen days. Applications deemed complete are taken under review for evaluation. Information regarding a preliminary license application under evaluation is announced on the Authority’s webpage. Third parties can file a written objection to the announced application within ten business days solely on the grounds of violation of personal rights.

As per Article 15 of the Regulation, an opinion shall be requested from the TEIAS (Turkish Electricity Transmission Company) and/or the distribution license holder legal entity regarding the preliminary license taken under review. TEIAS and/or the related distribution company, after finalizing its decision within forty-five days of the notice, presents it to the Authority, and said opinions presented to the Authority are communicated to the applicant within ten business days. If the applicant approves the opinions on the connection and system usage, it is obliged to submit the documentation regarding the approval and commitments on the opinion(s) within ten (10) business days to the Authority; or file a justified objection within ten (10) business days. Otherwise, the application is considered as approving of and committing to the opinion(s) on connection and system usage.

With respect to the works and procedures to be completed within the term of the preliminary license, which is one of the new practices stipulated by Article 17 of the Regulation, preliminary license holder legal entities have to apply to the related agencies; for example, within ninety (90) days to obtain the decision required by the Environmental Impact Assessment Regulation and within one hundred and eighty (180) days for the Technical Interaction Permit. Further, preliminary license holders, within the term of the preliminary license, shall complete transactions such as securing of property or usufruct rights, approval of zoning plans and obtaining approval for the preliminary project.

Companies that do not rectify their inadequacies within the term of the preliminary license, which cannot exceed twenty-four (24) months, will not be able to obtain licenses, provided that the exemptions are reserved. Moreover, the preliminary license becomes null automatically at the end of its duration or in case of bankruptcy of the preliminary license holder legal entity.

A preliminary licensee legal entity intending to place a generation license application can file a license application after having completed the requirements of the preliminary license. In case a preliminary license holder does not apply for a generation license before the term of the preliminary license ends, it will be deemed that the requirements for the generation license, which need to be completed within the duration of the preliminary license, have not been fulfilled.

The provision that prohibits share transfers in applicant legal entities for the duration of the preliminary license is one of the most important innovations brought by the Regulation that shall be taken into consideration. Article 28, Paragraph 2/(b) of the Regulation prohibits share transfers during the term of a preliminary license as follows: “Together with other requirements of applicable legislation, the preliminary licensee is obliged not to make any changes in the direct or indirect shareholding structure, transfer shares and perform other acts or transactions which may result in share transfers for the duration of the preliminary license, except in cases of bankruptcy and inheritance or other conditions set forth in this Regulation.” Where any of the transactions mentioned in this provision are carried out by the preliminary licensee legal entity, the preliminary license will be canceled.

Conclusion

Seven months after the Electricity Market Law entered into force, the Electricity Market Licensing Regulation (The “Regulation”) entered into force through publication in the Official Gazette, dated 2 November 2013 and numbered 28809. The goal of the Regulation is to set legal provisions which conform to the fast growing structure of the electricity market. The preliminary license, for which the application conditions are set by the Regulation, has emerged as an innovation, which responds to the needs of the sector. Investors are now able to perform transactions required by legislation during the term of a preliminary license, before submitting a license application, to apply for required permits and to preview, before passing to the license application phase, the performance and applicability of their investments. Thus, the licensing process has become more convenient for the investor and also for the administration.