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Monday, Oct. 10, 2011

SENTAKU MAGAZINE

Tepco guarding its ground

Recent moves by Tokyo Electric Power Co. vis-a-vis Tepco's Management and Finance Investigation Committee, an independent government panel, show how the power company has tried to avoid being forced to sell large chunks of its assets.

As part of its maneuvers, Tepco has insisted that raising power bills will be essential if it is to survive and compensate victims of the nuclear crisis at its Fukushima No. 1 power plant.

In early September, just as the government committee was looking into Tepco's managerial and financial standings, all major newspapers reported that the utility was considering raising electricity rates. Such a move would have run counter to the panel's goal of rigidly re-evaluating the company's assets and forcing it to sell large portions of them.

It is rumored that the news on the rate hike plan was deliberately leaked to the press by Tepco to divert public attention from the call for asset disposal.

In the aftermath of the March 11 earthquake and tsunami, Tepco lost all 10 reactors at its Fukushima No. 1 and No. 2 nuclear power stations. This caused cost increases for the company as it had to purchase more fuel to generate additional power at its thermal stations. Such additional costs are estimated to total about ¥1 trillion above last year's figure.

Tepco approached the panel with a plan to raise electricity bills by 15 percent for a limited period. The panel found such a plan utterly unacceptable while it was contemplating how best to slim the company through assets disposal.

Yet, the panel had no choice except to take up the utility's price increase proposal in accordance with the Electric Utility Law, which provides for a "cost-plus pricing" mechanism under which power companies may add certain profits to power generation costs before passing on the total to consumers as electric bills.

When this matter was reviewed at the panel's meeting Sept. 6, its chairman, Kazuhiko Shimokobe, countered Tepco's assertion by pointing out in strong words that there was a big gap between the cost figures announced by the company and the actual costs incurred by the utility.

According to estimates by the panel, such a gap came to a whopping ¥592.6 billion over the past 10 years.

The committee, in its final report to Prime Minister Yoshihiko Noda, called for changes to the cost-plus pricing formula. Tepco, and other power companies, can quash moves to change the formula on the grounds that the formula is a sort of reward for their legal obligation to supply electricity anywhere and to any person in the country.

While a business entity in other industrial sectors is free to terminate part of its operations should it prove unprofitable or loss-making, a public utility does not have such freedom under the law.

"If somebody tells use to stop using the cost-plus pricing formula, we would say, 'We are not in a philanthropic business,'" said a power industry person.

As expected, the government panel did not dwell on the issue of possible price increases. Chairman Shimokobe said, "Discussing specific percentage figures of electricity rate increases is beyond the authority given to my panel."

Instead, the committee included in its final report a rough simulation of price hikes. It is tantamount to the committee giving a de facto nod to Tepco's price raise plan. That was a clear victory for Tepco and the Ministry of Economy, Trade and Industry (METI), which is behind the utility.

Unless price hikes are tackled in earnest, it will be utterly impossible to prevent Tepco from "becoming richer after a fire" — the fire being the fiasco at the Fukushima No. 1 nuclear plant.

Tepco took an increasingly confrontational attitude toward the panel. President Toshio Nishizawa told the panel that his company planned to reduce its workforce by about 3,000 but failed to say when that would take place.

Nor did Nishizawa reveal any program for possible reduction of corporate pension payments to employees, saying that the matter was still being negotiated with the labor union.

Before the committee's final committee came out, Tepco increased the number of employees to process requests from victims of the nuclear accidents for payment of compensation.

In its final report, the committee called on Tepco to slash its workforce by some 3,600 (about 9 percent) and the Tepco group's workforce by some 7,400 (about 14 percent) by the end of fiscal 2013. It also called on Tepco to cut wages by 20 percent for the next 10 years and lower the pension fund yield ratio from 2 percent to 1.5 percent. With these measures, the report said, Tepco's labor costs would be pared down by ¥1.045 trillion.

In a plan it had handed to the committee, Tepco had said it would cut its costs by ¥1.185 trillion. The committee in its final report called on Tepco to slash the cost by ¥2.545 trillion by fiscal 2020.

If Tepco files a formal application to increase electricity charges, it will be difficult for the public and METI minister to stop rate hikes. That's because if the request is not granted, Tepco would become insolvent with ¥8.9 trillion worth of interest-bearing liabilities stranded in the financial market. In that case, there would be no entity responsible for, or capable of, paying the expanding compensation claims to victims of the nuclear accidents.

After the rate hikes likely to come next spring, Tepco will push hard for restarting five of the seven reactors at its Kashiwazaki-Kariwa nuclear power station in Niigata Prefecture, which are idle because of regular inspections, insisting that this would help lower electricity charges.

That would mark the beginning of the resuscitation of Tepco as it would regain its lost influence and power and rebuild its cozy relations with political, bureaucratic and business leaders.

This is an abridged translation of an article from the October issue of Sentaku, a monthly magazine covering Japanese political, social and economic issues, with some modifications added after the Tepco Management and Finance Investigation Committee submitted its final report to Prime Minister Yoshihiko Noda on Oct. 3.


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