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Tuesday, Sep. 6, 2011
Utilities have monopoly on power
Japan's high power rates stem from lack of competition, legally ensured profitability
Tokyo Electric Power Co. wants to raise electricity rates by more than 10 percent to help offset massive compensation claims related to the Fukushima No. 1 nuclear plant meltdowns, according to recent media reports.
Before March 11, the way power companies set their rates didn't attract public interest, but amid a widespread energy crunch and cries to replace atomic power and review reactor safety, this topic is drawing keen scrutiny.
Following are some questions and answers about Japanese electricity prices:
How much does electricity cost and have the rates been changing?
According to the Agency for Natural Resources and Energy, households were charged ¥20.54 per kilowatt-hour and industries paid ¥13.77 per kwh in fiscal 2009. Data for 2010 and 2011 are not available yet.
The past 17 years have seen rates decline from their peak in 1994 of ¥24.81 for households and ¥17.15 for industries.
Tepco's most recent plan charges households at a rate of ¥17.87 per kwh for up to 120 kwh, ¥22.86 for 120 to 300 kwh, and ¥24.13 for any electricity used beyond 300 kwh.
A household consuming 400 kwh a month, for example, would pay 120 kwh of that at a rate of ¥17.87, 180 kwh at a rate of ¥22.86, plus 100 kwh priced at ¥24.13. It doesn't have to pay for all 400 kwh at ¥24.13.
How are prices determined?
The nation's 10 power companies are territorial monopolies and cover one region each. They basically set rates based on the cost of generating and distributing power.
The electricity business law allows the utilities to set rates so that their power revenues always exceed operating costs, saying electricity prices should be the sum of "appropriate cost and appropriate profit."
But it also requires that the companies sufficiently meet demand for power in their areas.
The law only applies to the power generating segment of each utility.
Today, the utilities make a profit of about 3 percent, but this includes "profit" from fixed assets — including power plants and nuclear fuel — and even operating capital. The percentage is subject to change.
Does that mean they never log a loss and profits will rise if they just keep investing?
Theoretically, yes. But if they want to raise electricity rates, they need ultimate approval from the minister of economy, trade and industry. METI checks their business plans and judges whether the calculations are appropriate.
Sometimes utilities can face unexpected losses. The Fukushima crisis is a notable example. The March 11 quake and tsunami caused Tepco to post special a loss of ¥1.24 trillion in fiscal 2010.
Is electricity here expensive?
Yes, compared with other developed countries.
According to the International Energy Agency, Japan's standard electricity rates are eighth-highest in the world at $0.2276 per kwh. The industrial rate is fifth-highest, at $0.1578 per kwh.
Why is it so expensive?
The current pricing system, which allows the utilities to ensure profits, and the fact that each power company is a monopoly are the main reasons, experts say.
"I think it's because utilities have no competitors," said energy policy watcher Shinichiro Takiguchi, executive senior researcher at The Japan Research Institute.
Japan's regional monopoly system is unique in the industrialized world. In other countries, power prices are determined by open competition, Takiguchi said.
Some European countries, like Italy, have higher power rates, but those countries depend more on renewable energy, which initially tends to be expensive, he said.
Renewable energy only accounts for 9 percent of the electricity generated in Japan. Thus, the absence of competition must be the main factor behind the high rates, Takiguchi said.
Yu Tanaka, who has written a book about Japan's electricity pricing, said that national demand for power seems to have been overestimated.
This overestimate has prompted utilities to make more plants, Tanaka said. And since the value of fixed assets are factored into their profits under the electricity law, the utilities have built many costly plants, particularly nuclear power stations and fuel storage facilities, to the tune of several hundred billion yen.
Are the utility costs properly scrutinized?
Some costs are controversial.
For instance, Tepco claimed ¥11.6 billion in advertising expenses in fiscal 2010 and included the outlay in its operating costs.
Since Tepco effectively has no competitors, it is questionable whether it is even necessary to spend that much money on ads, Tanaka said.
Also, while spent fuel is considered an asset, and thus a profit factor, experts note that little progress has been made in advancing the nuclear-fuel-cycle policy, and thus should not be counted among profit criteria. In the meantime, the Fukushima crisis has probably doomed this program.
What is the outlook for power prices as the nation moves away from nuclear power?
Experts said that rate increases will likely be unavoidable in the near future as atomic power gives way to more renewable energy.
Takiguchi said the cost of renewable energy is expected to decline in the next 10 to 20 years but remain relatively expensive.
Takiguchi and Tanaka both agree that utilities should not be allowed to monopolize both power generation and distribution, which need to be kept as separate businesses to draw in more players and add the element of healthy competition to keep rates stable.
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