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Monday, March 12, 2012

SENTAKU MAGAZINE

Power reform now or never

Taking advantage of the serious difficulties besetting Tokyo Electric Power Co. (Tepco) since the catastrophe at its Fukushima No. 1 nuclear power plant, the Democratic Party of Japan government is pushing a series of measures to restructure the outdated way in which the electric power industry operates.

These measures include separation of generation and distribution of electricity, abolition of regional monopolies enjoyed by the power companies, liberalization of retail power distribution and a review of the standard for deciding power rates.

An advisory body for the trade and industry minister began discussions on these and other steps in early February and plans to draw up a report by summer.

It is not at all certain, however, that these measures will be fully implemented because the power industry's track record is one of steadfast resistance to fundamental reforms over the past six decades even as the nation as a whole has undergone various reforms.

Take, for example, the most crucial issue — the separation of power generation and distribution. At present, both functions are controlled by the power company that monopolizes an area.

It now appears likely that the government's plan will fall far short of "ownership separation," which is generally viewed as an essential element of power industry reform. Instead, the outcome will probably be "functional separation" — under which "independent system operators" take over the operation of power transmission lines and the management of power supplies. Ownership of the power grid will remain in the hands of the power company. This is hardly enough to make any dent in the power industry's monopolistic position.

In the trade and industry ministry, bureaucrats who favor functional separation have gained the upper hand over those who prefer the more stringent separation by ownership. The former have argued that depriving the power companies of their power transmission assets would not only infringe on their property rights but also trigger lawsuits from shareholders.

The government is demanding two-thirds or more of Tepco's voting rights as huge sums of taxpayer money are poured into the company to clean up the ill-fated nuclear plant, pay damages to residents of Fukushima Prefecture affected by the nuclear accident and eventually decommission the reactors.

According to an industry insider, the DPJ is preoccupied with the idea of nationalizing Tepco because ownership separation won't cause legal problems if Tepco is nationalized, and the party hopes to win popular support by pushing the ownership separation scheme.

The industry has reacted bitterly to this plan. Tepco President Toshio Nishizawa says the most efficient capital investments can come only from private corporations, and Makoto Yagi, president of Kansai Electric Power Co., asserts that consumers will benefit more if electricity is supplied by private companies.

More specifically, Tepco is insisting that the government's share of voting rights be limited to no more than one-third. If the government bows to Tepco on this score, the separation of power generation and distribution, or any substantial restructuring of Tepco, will become impossible.

Apparently fearing that continuing to oppose any reform would further antagonize the government, bureaucrats and people in general, the power industry has made a conciliatory move by offering to agree to the full liberalization of electricity supplies to ordinary households.

This has led some people to paint a rosy picture for future electricity supplies in Japan — that liberalization will promote competition. In reality, however, this logic won't work in this country. At the same time, liberalization means that power companies could freely raise power rates in the absence government regulations.

Electricity supplies to large consumers like factories and offices have already been liberalized, enabling newcomers known as "power product suppliers" (PPSs) to enter the market. But traditional power companies have turned out to be overwhelming winners in the competition. Newcomers' market share has remained far below 10 percent, indicating that their entry has resulted in skirmishes but not real competition. One factor behind this is the high charges that the PPSs must pay to traditional power companies for the use of transmission lines. This suggests, again, that any liberalization program won't work unless there is separation of ownership.

The newcomers are further disadvantaged by the recent increase in fossil fuel prices. Because they do not have any nuclear reactors , they have to rely exclusively on thermal power generation.

Some may contend that the new PPSs can compete with the established power companies on an equal footing because of the latter's inability to rely on nuclear power plants. In fact, most nuclear power plants have been out of operation with no dates set for their resumption.

There do appear to be steady moves to facilitate an early resumption of nuclear power plant operations after stress tests. The first restart of a nuclear power plant since the Fukushima nuclear crisis may face strong resistance. After the first restart, though, one nuclear plant after another will be restarted.

The government has decided to reorganize the Nuclear and Industrial Safety Agency, now under the wing of the trade and industry ministry, into a Nuclear Regulatory Agency under the Environment Ministry. This plan will probably make no more than cosmetic changes to the regulatory process as many workers for the new agency will come from the trade and industry ministry and will be allowed to go back to the ministry. The government bill to limit the life span of a nuclear reactor to 40 years is likely to include a loophole allowing extensions in exceptional cases.

Under these circumstances, the only way that consumers can prevent power rate increases would be to promote competition among the established power companies. But the past record shows power companies to be quite reluctant to rock the boat by expanding business into another power company's marketing territory.

Since the nuclear catastrophe, much pressure has been applied not only to Tepco but also to the power industry as a whole to implement long-overedue reforms. Instead of heeding such pressure, the industry has launched a counteroffensive to protect its interests. With Tepco in deep trouble, now may be the last opportunity to carry out a thorough restructuring of the nation's electric power industry. This glimmer of hope appears to be fading away fast.

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


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