Determining the cost of capital for Turkish electricity distribution utilities: Analysis and recommendations

Turkey has been transforming her electricity market to a competitive one since the electricity market law was approved by the parliament in 2001. As part of the new regime, electricity distribution activities are subject to incentive-based regulation by the energy regulator - EMRA. At the beginning of each implementation period, initial revenue is allowed by EMRA for a distribution utility in which a rate of return for investments in the utility is added. Setting a fair rate is relatively easy for mature markets; however, it is rather difficult for countries like Turkey. The models applicable to Turkey take the perspective of a global investor, provide different results and thus are not helpful as they do not even guide EMRA in accomplishing its tasks. As a result, EMRA is applying the same rate to all utilities. This would be logical when the state or the same private group owns all utilities in the country. However, the Turkish government is now privatizing distribution utilities. Currently, different distribution utilities have different shareholders with different return expectations. Therefore, each utility must be allowed different rates of return. Unfortunately, the models applicable to Turkey provide either countrywide or industry specific cost of capital figures.