final report erra member to-member projects 2016 · tel.: +36 1 477 0456 • e-mail:...

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]

[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

mailto:[email protected]

http://www.erranet.org/


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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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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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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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-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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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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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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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



http://www.epdk.org.tr/

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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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