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Monday, July 25, 2011

SENTAKU MAGAZINE

Tepco's fight for distribution

The regional monopoly enjoyed by the electric power industry in Japan has come under unprecedented criticism since the March 11 earthquake and tsunami damaged the Fukushima No. 1 nuclear power station, causing radioactive leaks and creating a highly political issue of how to compensate victims.

The entire industry, especially Tokyo Electric Power Co. (Tepco), the operator of the stricken plant, is becoming increasingly scared of political initiatives aimed at reforming the present system under which each of the 10 regional utilities has a monopoly on both the generation and distribution of electricity in its respective territory.

Tensions are mounting between the government and Tepco, as the former is increasingly inclined to separate the generating and distributing sides of the utility's operations.

In reality, though, the operation of a utility is divided into three fields: (1) generation of electric power, (2) transmission of power from power plants to transformer substations, which changes the voltage of electricity, and (3) distribution of power from transformer substations to end-users like factories, offices and individual homes.

One scholar versed in the electric power industry has said that not much can be expected from the government's approach to rectifying the monopolistic operations of Tepco. That's because the government does not appear to have a clear policy of how to change the distribution system.

Even if the power-generating division is separated from Tepco, he argues, the company would continue to enjoy a monopoly as long as its distribution division remains intact, because Tepco would have complete control over the power generation entities from which it would purchase electricity.

This means that even if power generation were liberalized, new entrants into this field would first have to receive a blessing from Tepco, which would continue to have a total monopoly to determine who the suppliers would be.

In several other countries, liberalization of the electric power industry has resulted in the absorption of power plant operators by distribution companies. If this pattern was repeated in Japan, Tepco would eventually be restored to the same monopolistic status that it enjoys today.

It is for this reason that Tepco's biggest worry is to be deprived of its distribution business. If this becomes a reality, the company will lose its decisive power in the distribution business and its status will come down to the level comparable to that of any new entrant in the field.

The government of Prime Minister Naoto Kan appears interested only in separating power generation, especially nuclear power, from Tepco, and has not conducted any in-depth discussion on separating the distribution side from the transmission side.

Any attempt to overhaul the electric power distribution system in Japan cannot be expected to bear fruit within a short time. It would require at least five years to institute reforms that would be effective enough to change Tepco's current monopoly, because the process will require building consensus among experts and the public as well as a thoroughly revising the Electric Utility Law, which was instituted in 1964 to govern all aspects of the electric power industry.

The ruling Democratic Party of Japan, headed by Prime Minister Kan, may resort to its favorite tactics of working behind closed doors to draw up a legislative bill to revise the Electric Utility Law.

Even if that happens, it will be no easy task to pass it through the Diet, where the governing parties lack a majority in the Upper House.

Aware of these circumstances, Tepco has reportedly given up on working closely with the DPJ and has started approaching the Liberal Democratic Party and other opposition parties in the hope of revising or killing any legislative bill unfavorable to the company.

The company plans to help the opposition camp defeat the DPJ in the next general election.

Angered by the Kan government's policy of forcing Tepco to bear the brunt of paying damages to the victims of the nuclear plant disaster, the company's chairman, Tsunehisa Katsumata, is said to have adopted a posture of confrontation wtih the DPJ.

Even if the power distribution business is liberalized, it will not be easy for any newcomer to enter this field, because all 10 regional utilities have, over past decades, penetrated deep into the end-user part of the business.

Their marketing experts have gained strong footholds in ordinary households by advising them on the installation of photo-voltaic systems or the "electrification" of their home appliances.

Tepco, and other utilities for that matter, feel a sense of trepidation at the prospect of their distribution divisions being separated from them. Therefore, concerted efforts are being made to counter any move to make the separation.

One Tepco insider has been quoted as saying: "If the government wants to separate nuclear power generation from us, let them do it. As long as we control the distribution side, we will continue to have the power to decide whether we will buy electricity from a new nuclear power generation entity."

If the Kan administration focuses only on spinning off nuclear power generation from the existing utilities — without separating the distribution side from the transmission side — it will make Tepco and other power companies most happy.

This is an abridged translation of an article from the July issue of Sentaku, a monthly magazine covering Japanese political, social and economic scenes.


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