Adapting Bilateral Agreements based on Natural Gas in the Electricity Market
Introduction
Natural gas plays a substantial role in the generation of electrical energy. In fact, the proportion of natural gas fueled power plants in the field of licensed electrical energy production increased to 37.18% in 2017[1]. Considering the high margin of natural gas in electrical energy generation, the decisions of the Petroleum Pipeline Company (“BOTAS”) regarding the sales prices of natural gas have a crucial impact on the electricity market. In this regard, as BOTAS announced on 31.07.2018, the new regulations regarding the wholesale prices of natural gas produced some repercussions in the electricity market. Additionally, the loss of value of the Turkish Lira against the US Dollar also rendered the consequences of bilateral contracts in the electricity market vague.
On the other hand, substantial developments in the energy market also introduced important legal discussions. The leading topic amongst these discussions is whether or not bilateral contracts may be adapted to changes in circumstance as per Turkish Code of Obligations No. 6098 (“TCO”).
Impacts of the Developments in the Natural Gas Market on the Electricity Market
In the press statement of BOTAS dated 31.07.2018, it states that due to the significant increase in the price per barrel of crude oil, and changes in the exchange rates, there has been a substantial increase in the cost to purchase natural gas. Also, due to the increase in the brent oil prices and the exchange rates within the last 2 years, changes to the regulations was found necessary with respect to the pricing of natural gas wholesale. One of the new regulations stipulates that the price for natural gas of free consumer customers who use natural gas for the purpose of electricity generation shall be 270 US Dollar/K Sm³ as of 1 August 2018, and that it shall be billed in Turkish Lira at the current exchange rate. Due to the fixed natural gas price of 270 US Dollar/K Sm³, it is anticipated that BOTAS will determine a new price each month in accordance with the US Dollar exchange rate to be considered. As well, the sales price of natural gas has also increased. Whilst the June, 2018 tariff price applied to those free consumers who have signed a purchase and sale agreement of natural gas with BOTAS for the use of electricity generation was 0,877600 TRY/Sm³, the tariff prices increased to 1,312200 TRY/Sm³ in August, 2018, and to 1,700000 TRY/Sm³ in September, 2018[2]. Taking these data into consideration, it is clear that the tariff prices have drastically increased. Hence, comparing the tariff prices of August and July announced by BOTAS, an increase of 49.5 % has been realized. Specifically, in comparing the tariff prices of July and September announced by BOTAS, there was an approximate increase of 93.7 %. In short, the price paid by electricity generators for the natural gas they bought has almost doubled as of July.
Bilateral Agreements
Bilateral agreements are commercial agreements subject to private law provisions that have been made regarding the purchase and sale of electrical energy and/or capacity between natural and legal persons, and which are not subject to the Energy Market Regulatory Authority’s approval[3]. A substantial part of the trading energy in the Turkish electricity market is traded through bilateral agreements.[4] The possibility of adaptation due to the changed circumstances regarding these bilateral agreements playing a significant role in the energy market shall be addressed from a legal perspective. In light of the above data, it is possible to say that the increase of natural gas sales prices by BOTAS, and the fluctuations in currency exchange rates has had a direct impact on bilateral agreements based on natural gas.
Adaptation of the Contract
Our legal system adopted the principle of pacta sund servanda for the sake of the principle of good faith and legal security. Pursuant to the principle of pacta sund servanda, after a contract is duly formed, the parties are obliged to perform their obligations, accordingly, irregardless of the changed circumstances[5]. However, changed and aggravated circumstances after the formation of the contract can sometimes be an exception to the principle of pacta sund servanda. In fact, unforeseen developments that parties did not take into account during the formation of the contract may occur, and the subsequent change of state may cause the collapse of the basis of the transaction[6]. For instance, in the event of an undertaking given to deliver a product consistently and at a certain price, it would not be fair and just to expect the obligor to perform its obligation under the same conditions if the value of the money decreases significantly[7]. In such cases, the parties of the agreement in which the circumstances have changed, or have been aggravated, may either agree to adapt the agreement to new circumstances or, if that is not possible, use their right to revoke the contract. However, there are certain conditions for the adaptation of the contract according to the changed circumstances, or the revocation of the contract.
Pursuant to Article 138(1) of the TCO entitled “Hardship,” all of the required conditions mentioned, below, must be present in order to justify the adaptation of a contract, or to trigger the right to revoke:
- An extraordinary unexpected event, which was unforeseen and not expected to have been foreseen by the obligor, must occur after the contract was entered into;
- There must be no negligence on the obligor’s part in the occurrence of the extraordinary event;
- Performance must have become excessively burdensome for the obligor because of the extraordinary event in light of the principle of good faith;
- The obligor must perform his obligation by reserving the right arising from the hardship, or the obligor must not have yet performed the contract. Additionally, as per Article 138(2) of the TCO, this Article also applies to foreign currency debts. If all of the conditions under Article 138(1) of the TCO are met, the obligor may request the adaptation of the contract from the judge in accordance with the changed circumstances. If the adaptation is not possible, the obligor may revoke the contract.
It is crucial to state that not all of the unforeseen and unexpected to be foreseen events, but only extraordinary events (war, economic crisis, devaluation, natural disasters, bans and menaces on imports and export[8]) are accepted as reasons for adaptation. In other words, any misfortunes and negativities encountered whilst performing the contract shall not allow for the adaptation[9]. Under our law system, the adaptation of the contracts arises with the distortion of the balance of performances due to economic crisis[10]. However, the foreseeability of economic crisis is disputed in judicial decisions. For instance, the decision of the General Assembly of the Civil Chambers of the Court of Appeal[11] states that “Since 1958, in our country, devaluations are declared, frequently, money adjustments are made, and the value of Turkish Lira has been decreased against the dollar and other foreign currencies. The economic instability in our country is a foreseeable circumstance to the merchant plaintiff. In a solid case, the unforeseeability criteria amongst adaptation conditions has not been met” and indicates that economic instability does not always satisfy the unforeseeability condition.
The Court of Appeal has various decisions concerning adaptation of the contract. According to the characteristics of a solid case, it was decided that some of the contracts could be adapted, and some of them could not. For instance, a decision[12] of the 13th Civil Chamber of the Court of Appeal dated 2017 concerns the request for adaptation of the contract due to the excessive appreciation of the Japanese Yen against the Turkish Lira, following the signing of the contract between a bank and the claimant, who uses a Japanese Yen indexed housing loan. The decision of the 13th Civil Chamber of the Court of Appeal stated that, “Firstly, it is necessary that unforeseeable extraordinary events should take place after the signing of the contract, the contract should be long-term, the unforeseeable extraordinary events should be valid for everyone, be objective and cannot be predetermined, the changed circumstances make the performance of the contract unbearable and, thus, the basis of the transaction could collapse. In the case at hand, it is clear that the plaintiff, having the freedom to choose at the beginning, used the housing credit indexed to foreign currency instead of the TRY. In other words, he determined the type of the credit through his freewill. Furthermore, the claim that bank employees misled the plaintiff has not been proven. On the other hand, it is a well-known fact that economic crisis occurs occasionally in our country, and there is risk to obtain a loan in foreign currency.” The adaptation request was rejected.
Furthermore, another decision[13] of the 13th Civil Chamber of the Court of Appeal concerns the adaptation of a rental fee. In this decision, the rental fee determined in the contract shall be adapted according to the following conditions:
“…Within the time period between the formation of the contract and the motion date, the value of foreign currency to the Turkish Lira reached with the normal increases pursuant to the vested economic circumstances of our country should be determined, and this value should be accepted for the benefit of lessor pursuant to the contract. Then, the increase in the value of foreign currency against the Turkish currency should be determined through the date of the case and, thus, the difference between the two values, special provisions in the contract, nature of leased property, area of application, its location, changes in the region above the normal which would also affect the rental fee, such as zoning and commercial developments, precedent rental fees, increases in the taxes and depreciation expenses with objective factors in the solid event, should be compared and evaluated. As a result, if it is deduced that the basis of the transaction has collapsed, and there is a distortion of balance of interest in the contract that can no longer be tolerated by the plaintiff, then the amount of the rental fee, which the lessee will be responsible for, should be determined. Hence, the rental fee in the contract should be adapted, as again in foreign currency, in accordance with the objective of bona fide and equity which fit the purpose of parties.”
It is hard to say that the Court of Appeal has a consistent attitude regarding the adaptation of contracts. This is based on the fact that the predictability of economic conditions, its effects, the rights and benefits provided by the parties, and the adaptation of the contract is determined according to the characteristics of each solid case. There is another point that is worth mentioning here. Sometimes, although the event itself is foreseeable, it may not be possible to foresee its results[14]. Thus, although the event itself can be foreseeable, and it can be assumed that the unforeseeable condition has been met for the events of which their results give rise to abnormal results[15].
Conclusion
It should be evaluated through objective criteria as to whether a rise in the sale price of natural gas by BOTAS and the exchange rate fluctuations have caused hardship in the fulfillment of the bilateral agreements, based on natural gas in the electricity market in light of Article 138 of the TCO. Also, the decisions of the Court of Appeal on the adaptation of contracts also vary and different interpretations have been reached according to the characteristics of each event. Lastly, the most important point to be noted is the compliance of the actions expected to be performed in accordance with the changing conditions taking into account the rules of good faith.
[1] EMRA, Electricity Market Progress Report, 2017, p. 5, http://epdk.gov.tr/Detay/Icerik/3-0-0-102/yillik-rapor-elektrik-piyasasi-gelisim-raporlari (Last access date: 24.09.2018).
[2] See https://www.botas.gov.tr/index/tur/faaliyetler/dogalgaz/tarifeSerTukV10.asp (Last access date: 24.09.2018).
[3] Electricity Market Law No. 6446.
[4] EMRA, Electricity Market Progress Report. 2017, p. 37 (Last access date: 24.09.2018).
[5] Ahmet M. KILIÇOĞLU, “Law of Obligations General Provisions”, Ankara, 2012, p. 249.
[6] Başak BAYSAL, “Adaptation of the Contact,” February, 2009, p.115.
[7] M. Kemal OĞUZMAN, Turgut ÖZ, “Law of Obligations General Provisions V-1,” İstanbul, 2014, p. 580.
[8] M. Kemal OĞUZMAN, Turgut ÖZ, “Law of Obligations General Provisions V-1,” İstanbul, 2014, p. 582; 13th Civil Chamber of the Court of Appeal numbered E. 2012/8250 K. 2013/2623 and dated 7.2.2013 (Kazancı Regulations and Jurisprudence Bank).
[9] Başak BAYSAL, “Adaptation of a Contract,” February, 2009, p. 143.
[10] Başak BAYSAL, “Adaptation of a Contract,” February, 2009, p. 152.
[11] T.R. General Assembly of the Civil Chambers of the Court of Appeal numbered E. 2003/13-332 K. 2003/340 and dated 7.5.2003 (Kazancı Regulations and Jurisprudence Bank).
[12]13th Civil Chamber of the Court of Appeal numbered E. 2016/7269 K. 2017/8431 and dated 21.9.2017 (Kazancı Regulations and Jurisprudence Bank).
[13] 13th Civil Chamber of the Court of Appeal numbered E. 2003/1281 K. 2003/3909 and dated 3.4.2003 (Kazancı Regulations and Jurisprudence Bank).
[14] Başak BAYSAL, “Adaptation of a Contract,” February, 2009, p. 171.
[15] Başak BAYSAL, “Adaptation of a Contract,” February, 2009, p. 171.
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