Japan set to overhaul its power sector


This picture taken on March 11, 2013 shows Japanese Prime Minister Shinzo Abe speaking during a press conference at the prime minister's official residence in Tokyo. (KAZUHIRO NOGI/AFP / Getty Images)
April 2, 2013

Japan has committed to an overhaul of its electric-power sector after Prime Minister Shinzo Abe’s cabinet approved a plan Tuesday to split utilities’ generation and transmission businesses and open the residential electricity market to competition.

The changes, which will be implemented over five years starting 2015, mark the most comprehensive restructuring of the industry since the 1950s, when Japan split its national power provider into 10 regional utilities. The move reflects dramatic shifts in the domestic power industry since the March 2011 Fukushima Daiichi nuclear accident.

Experts say businesses and the economy have much to gain from increased competition, as the high cost of power is seen by many as a disincentive to investing in Japan.

Even before the Fukushima disaster prompted the shutdown of most of Japan’s nuclear plants, pushing up generating costs, electricity rates were twice those in the United States and triple those in South Korea.

“This reform targets the whole system, from upstream generation to downstream consumption. More choice should lead to lower rates,” said Toshimitsu Motegi, the industry minister.

Proposals to boost competition have long been resisted by politically influential utilities. The nuclear disaster has weakened their lobbying power while intensifying pressure to rein in prices, though critics say that has not stopped utilities from trying to slow the process of change.

The plan approved Tuesday showed signs of having been hedged in small but potentially important ways by politicians close to the industry. The administration’s original proposal said the government “will submit” a bill to parliament in fiscal 2015 mandating the division of generating and transmission.

But a committee of Abe’s conservative Liberal Democratic Party, long a champion of the utilities, changed the wording to “around 2015.” It also added a provision directing the government to guarantee the “stability” of electricity supplies before allowing new entrants into the market — something critics said could be used to create obstacles to liberalization.

“There is still the danger that the change could be postponed or otherwise made toothless,” the liberal-leaning Asahi daily newspaper said.

Nevertheless, the breakup of the regional power companies, which operate as quasi-monopolies despite halting deregulation efforts that began in the 1990s, is seen by many as the political price being paid by the industry in return for government support after the Fukushima disaster.

Tokyo Electric Power Co. (Tepco), the owner of the Fukushima plant, was effectively nationalized last year as part of a 1 trillion yen ($11 billion) state bailout. The government also has pledged to cover trillions more yen worth of compensation payments to evacuated residents and other victims of the disaster.

In addition, the government has allowed Tepco and other utilities to raise rates significantly to cover their ballooning fuel bills, as they import more oil and gas to make up for idled nuclear capacity. All but two of Japan’s 50 reactors remain offline as utilities and regulators work to address safety concerns.

After the cabinet approved the industry overhaul Tuesday, the industry minister granted permission to two utilities — Kansai Electric and Kyushu Electric — to raise residential rates, by an average of 9.75 percent and 6.23 percent, respectively.

Tepco raised residential rates by more than 8 percent last year. Rates for factories and other large-scale users, which are not regulated, have gone up by about twice as much across the country.

The government previously estimated that Tepco’s rate rises alone could drag the economy down by 0.1 to 0.2 percentage points, underscoring the need to find ways of curtailing the increase in prices.

In 2005, Tepco and other utilities persuaded the government to abandon its plan to expand deregulation to the residential market, meaning that only large users have the right to choose their provider. But even in the deregulated part of the sector, only about 2 percent of users have switched away from their regional utility.

Incumbents impose what critics say are unreasonably heavy distribution charges on outsiders, making it difficult for new entrants — a problem that reformers hope will be solved by dividing utilities into separate transmission and generation businesses.

— Financial Times

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