Separating power generation and distribution - But when ?

April 3, 2013

Pressure from industry and LDP waters down power reform proposal

http://mainichi.jp/english/english/newsselect/news/20130403p2a00m0na013000c.html

The Cabinet approved a proposal April 2 to drastically overhaul the country's power system.

The reforms would include the splitting of major utilities' power generation and distribution into separate companies, and the complete liberalization of electricity supply to low-volume users such as private households.

While this would bring down regional monopolies of major utilities over household supply, and likely bring electricity prices down through increased competition, there is a deep-rooted wariness toward such change within the power industry and the ruling Liberal Democratic Party (LDP), casting a shadow on whether reform that puts consumers first will actually be realized.

Meanwhile, Economy, Trade and Industry Minister Toshimitsu Motegi emphasized the positive effects that could be anticipated from power reform at a press conference April 2. "Reform will expand the range of choices for consumers. Ultimately, it will lead to the lowering of electricity prices."

Also on April 2, Prime Minister Shinzo Abe ordered that "the reform policy be implemented swiftly, without omission," at the Headquarters for Japan's Economic Revitalization.

The proposed reforms will help establish an environment conducive to non-major power generation companies to enter the market, thereby encouraging competition that will lead to the streamlining of power company management and lowered electricity prices.

By demonstrating a commitment to reform through the announcement of plans to completely liberalize power retail and splitting off major utilities' distribution divisions, Abe hopes to maintain support for his administration while reviving the Japanese economy.

In particular, the separation of power generation and distribution is a main pillar of the proposed reforms that major power companies have long opposed.

Because companies newly entering the power generation business do not have the facilities to distribute electricity to customers, they borrow such networks from the major utilities that do. However, there is deep-rooted discontent with the arrangement among the newer power generators, who argue that prices for using transmission networks are high and the manner in which they are set murky, and also that the major utilities cite insufficient transmission volume as a reason to prevent the newer companies from using the networks to their satisfaction.

As such, the current system in which power generation and transmission are carried out by the same utilities has been viewed as an impediment to the emergence of new power companies. A senior official at the Ministry of Economy, Trade and Industry says that separating power generation and transmission will allow the use of transmission networks by new businesses, and "eliminate barriers to competition."

There is no guarantee, however, that the reforms will unfold smoothly. Objections to the separation of power generation and distribution erupted at a March 18 meeting of the LDP's Economy, Trade and Industry Division. Some participants took an adamant stand against such a move, while others argued that it was an obvious attempt to push through with reforms at a time when major utilities have been forced to raise prices and don't have much of a say.

The administration originally indicated in its proposal that the submission of related bills would take place in 2015, but was forced to revise the phrasing to say it will "aim to submit (related bills) in 2015." Additionally, at a subsequent General Council meeting, party members demanded that the government fulfill four conditions, including putting its utmost efforts into restarting the country's nuclear reactors and stabilizing the finances of Tokyo Electric Power Co., operator of the stricken Fukushima nuclear plant.

In the backdrop of this resistance is the political power amassed by major power companies who have built up close ties with regional economies through massive capital investments. These major utilities opposed past debates on liberalization by arguing that threats to their finances due to increased competition could pose problems for the stable supply of electricity. By controlling the networks necessary in bringing power from the generators to consumers, and agreeing to "liberalize" to new power companies on conditions favorable to themselves, they have kept competition to a minimum.

Indeed, the market share of new power companies supplying electricity to corporations and factories -- for which liberalization has already taken place -- is a mere 3.5 percent. Moreover, there has been little effort on the part of major utilities to win over the customers of their competitors. One insider admits that major utilities want to avoid competition, saying, "If certain customers got lower prices, other customers would demand the same, and there would be no end to it."

Regarding when power generation and distribution would be separated, Motegi denied the administration had backed down from its original intent by changing the phrasing in its proposal, saying, "It will take place seven years from now. Whether or not we say we will 'aim' to accomplish it then makes no difference."

According to a senior METI official, however, subtle changes in the proposal can have significant effects on the extent and timing of reform. "The administration has retreated to a level where, if the separation of generation and distribution is overturned later, no one can complain about it."