Japan Utilities May Lose Electricity Grid to Consumers’ Benefit

Japan took a step toward stripping its power monopolies of distribution and transmission assets, potentially lowering electricity prices and giving users a choice of provider. Except consumers will have to wait.

A government appointed committee today recommended 2018 to 2020 as when the 10 regional utilities, including the biggest Tokyo Electric Power Co. and Kansai Electric Power Co., should spin off distribution networks, dismantling a model that helped rebuild Japan’s economy after World War II.

The plan “would force power companies to compete on services” including electricity pricing, Hiroshi Takahashi, one of the panel’s 11 members and a research fellow at Fujitsu Research Institute, said today in a phone interview before release of the report. “Generation and distribution under the same company means utilities don’t have to improve services because customers have no choice of supplier.”

The recommendations follow a model in Europe. In 2009, the European Parliament approved legislation to force utilities to improve access to their transmission networks. In Germany, RWE AG, the country’s second-biggest utility, sold a majority control in its grid company in 2011, following its competitors E.ON AG and Vattenfall to satisfy regulators.

After four previous attempts at reforming Japan’s power market “the regional utilities’ monopoly market structure is basically unchanged,” according to a draft of recommendations from the panel headed by Motoshige Itoh, an economics professor at the University of Tokyo.

Expensive Power

It also calls for setting up a new regulator by the end of 2015 to police competition among power producers and fully liberalizing the retail market a year later. The report next goes to Toshimitsu Motegi, the Minister of Economy, Trade and Industry, for review and is subject to change.

The utilities’ control of electricity generation, distribution and the transmission grid has been cited as one reason power tariffs in the country of 127 million people are twice those in the U.S. In response, the utilities have said the system provides stable power supply.

Since the Fukushima nuclear disaster in 2011, the public has demanded more independent oversight of the utilities as the disaster showed Tokyo Electric ignored warnings of earthquake and tsunami risk. That followed revelations the power producers falsified maintenance reports for decades.

“It is extremely difficult to make any decision on revising the organizational structure at this time, as it would have a tremendous impact on corporate management,” Kansai Electric President Makoto Yagi, who also is the chairman of the the Federation of Electric Power Companies, said in January.

Breakup Cost

Separating distribution may make investors uneasy, making it more difficult for the power companies to raise funds in financial markets, the group of Japan’s 10 regional utilities, warned last month in a report to Itoh’s panel. The restructuring would cost about 410 billion yen ($4.4 billion), the industry group estimated in the report.

Breaking up the utilities would probably follow the model used for Nippon Telegraph and Telephone model, said Takahashi.

NTT, the former government monopoly for domestic phone services, underwent a state-led reorganization in 1999 and now operates in a holding company structure made up of five major units.

“Power companies wouldn’t oppose the spinoff plan if it didn’t contain substantial change,” said Hidetoshi Shioda, a Tokyo-based senior analyst at SMBC Nikko Securities Inc.

“They are against it because the plan is deliberately ambiguous. They suspect the reform may not end at this first step and could lead to second- and third-rounds of reforms”

All the regional utilities that own nuclear reactors forecast a loss in the year ending March as most nuclear plants are idled after the Fukushima disaster in 2011. Kansai Electric, Japan’s most nuclear reliant utility, expects to have a net loss of 265 billion yen this fiscal year.

Spinning off the utility operations within five to seven years is “too slow,” Takahashi said. “No other countries spent such a long time to carry it out.”

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