Japan Passes First of Reforms to Reshape Power Industry

Japan’s lawmakers approved a first step to weakening the monopolies of regional power utilities by setting up an independent body to coordinate supply and demand across the nation’s electricity grids.

Legislation passed today by the upper house calls for the creation of the body by 2015, according to the Ministry of Economy, Trade and Industry. The step is a first move to reforming the power industry of the world’s third-largest economy after the March 2011 nuclear disaster.

Along with later reforms scheduled to take effect after additional parliamentary votes, the new body aims to increase competition by loosening the control the 10 regional utilities have in their respective areas on generation, transmission and distribution.

“The legislation passed today is a significant milestone in the transformation of Japan’s energy sector,” Takehiro Kawahara, a Japan analyst at Bloomberg New Energy Finance, said in an e-mail. “The electricity retail market is about $150 billion and only about half of that has been open to competition.”

Today’s approval followed the Nov. 1 passage of the bill through parliament’s lower house. Trade ministry officials will now work on the law’s implementation. An earlier version of the legislation was scrapped after lawmakers failed to vote on it before the conclusion of the parliamentary session that ended in June.

Controlling Costs

Lawmakers are expected in coming sessions to consider bills liberalizing the retail electricity market by 2016 and requiring utilities, including the biggest, Tokyo Electric Power Co. (9501) and Kansai Electric Power Co. (9503), to break their generation, transmission and retail operations into separate legal entities from 2018 to 2020.

The reforms will probably show few clear benefits until the utilities’ operations are “unbundled” into the separate units, since that step will encourage companies to seek customers in other regions by severing ties to their existing distribution arms, Hiroshi Takahashi, a research fellow at the Fujitsu Research Institute, said today in an interview.

“Without structural unbundling there will not be real competition,” Takahashi said.

Stable Supply

Tokyo Electric, the nation’s biggest utility by generating capacity, took a step toward achieving those reforms this year, when it divided itself into separate production, distribution and retail divisions. The company denied a Nov. 8 report in the Nikkei newspaper that it had decided to formalize that split by forming separate companies under a holding company before the end of March 2017, according to a statement on its website.

The utilities’ control of electricity supply has been cited as one reason power tariffs in the country of 127 million people are twice those in the U.S. The need to reduce power prices became more acute after the Fukushima nuclear disaster of March 2011, which has shut down all of Japan’s atomic plants for safety checks, increasing its dependence on more expensive fossil fuels.

“There are more than a few challenges to overcome in order for us to remain capable of providing a secure power supply as these reforms continue,” Makoto Yagi, the chairman of the Federation of Electric Power Cos., said in a statement after the vote.

Grid Management

“Especially when it comes to the separation of power distribution, the rules and mechanisms to achieve that step must be carefully developed so as not to disturb the stable supply we have enjoyed under the integrated system,” said Yagi, who also serves as president of Kansai Electric, the nation’s second-largest utility.

The body to be established under today’s legislation will be staffed by officials from the nation’s utilities and could lack independence, Fujitsu Research’s Takahashi said.

“Utilities own not just the grid but also the generation capacity,” said Takahashi, who served on a government advisory board that had recommended the grid-management body be given a stronger role. “They have a strong incentive to utilize their own capacity.”

To contact the reporter on this story: Jacob Adelman in Tokyo at jadelman1@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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