Competition by regulation in energy markets: the case of Turkey

Abstract

A fundamental question facing the regulatory and competition authorities is whether to delegate competition policy issues of utilities to regulatory agencies or competition authorities. While, some countries prefer ‘light handed regulation’ by competition authorities, others grant substantial power to independent regulatory agencies. Turkey followed the liberalization wave in electricity with a regulatory reform in 2001. Recently, a slight shift of tide has appeared in previously liberalized markets. Electricity markets are the forefront example of this change of course. A similar trend is apparent in Turkey as well. Increasing pressures on prices and excess demand have created more reasons for active government involvement. As political factors weigh in, economic considerations take a secondary place in electricity markets. In order to show the tension between political and economic preferences, we use the Pareto and Kaldor-Hicks criteria of welfare economics metaphorically. This paper discusses the scope of competition policy in the Turkish electricity industry. We focus on the issue of regulatory governance. The absence of a well established institutional environment reduces the potential role of competition policy in the industry and increase political meddling in all segments of the Turkish electricity market. By looking into changes in prices, market power and new entry closely, we discuss the relative success of the regulatory reform in the electricity industry. We conclude by emphasizing the consequences of a passive competition authority in establishing a competitive electricity market.