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TEPCO's financial plan "built on shaky ground"

January 9, 2014



Tepco’s flawed turnaround plan


Tokyo Electric Power Co.’s proposed new financial turnaround plan is built on shaky ground since it continues to rely on the restart of the idled reactors at its Kashiwazaki-Kariwa nuclear power plant in Niigata Prefecture, where local authorities remain wary of restarting operations while the contaminated-water mess continues at the utility’s crippled Fukushima No. 1 nuclear power plant.

Tepco’s scenario in its previous plan compiled in May 2012 proved to be pie in the sky, as it was built on the assumption that the Kashiwazaki-Kariwa plant, the world’s largest in terms of output capacity, would be reactivated in April 2013 — which did not happen. The Nuclear Regulation Authority’s screening of Tepco’s applications to resume the operation of reactors Nos. 6 and 7 at the plant began in November after a two-month delay, and it remains unclear how long the process will take.

The utility, which also needs massive financial support from the government, should review the plan and draw up a more credible scenario in which the company can regain profitability through greater efficiency of operation — without relying on the restart of its nuclear power plants.

After the March 2011 meltdowns at Fukushima No. 1, Tepco was effectively placed under state control in 2012 as the government injected ¥1 trillion into the embattled utility through the state-backed Nuclear Damage Liability Facilitation Fund and obtained a majority of the company’s shares with voting rights.

A mechanism was created for the fund to lend up to ¥5 trillion in interest-free loans to Tepco to pay for compensating victims of the nuclear disaster and cover the cost of decontaminating areas contaminated by radioactive fallout. Still, Tepco has been asking for increased support from the government on the grounds that such costs proved larger than expected and are too much for the company alone to shoulder.

The new turnaround plan, submitted by Tepco and the fund in late December for government approval, calls for raising the ceiling on interest-free loans to ¥9 trillion, and assumes that the state will cover the expense for additional decontamination work and ¥1.1 trillion in construction and maintenance costs of a temporary storage for contaminated soil.

If the plan is approved, the government will be more deeply involved in the work to clean up the mess from the meltdowns, while placing a cap on Tepco’s financial burden so that its rehabilitation can move forward. Increased government support means greater use of taxpayer money. If it is going to approve the new plan, the government needs to publicly explain why.

The turnaround plan meanwhile assumes that the reactors at the Kashiwazaki-Kariwa plant — currently all idled — will be restarted beginning in July. While noting that ¥100 billion to ¥200 billion in annual pretax profits can be expected for eight years beginning in fiscal 2015 if all seven reactors are restarted, it points to the possibility of an additional hike in electricity charges of up to 10 percent this year if none of the reactors is restarted.

The new plan, effectively a joint product of Tepco and the government, comes on the heels of the Abe administration’s draft basic energy policy, which calls nuclear energy an “important base-load power source that serves as a foundation” for the nation’s energy supply stability — a clear turnaround from the previous Democratic Party of Japan-led administration’s policy of seeking a phaseout of nuclear power generation in Japan by the 2030s.

It is ironic that the Tepco rehabilitation plan, on one hand, calls for additional public financial support to clean up the mess from the nuclear disaster at the Fukushima plant and, on the other, presumes that the restart of the Kashiwazaki-Kariwa plant will rebuild the utility’s finances.

Niigata Gov. Hirohiko Izumida, whose consent will be necessary for restarting the plant, remains opposed on the grounds that thorough examination of the Fukushima plant disaster needs to come first. The NRA says the safety screening of the Kashiwazaki-Kariwa plant could be suspended if a serious problem emerges in the ongoing efforts to manage the aftermath of the Fukushima plant meltdowns.

Power companies say the huge cost of imported fuel for thermal power generation to make up for the suspended nuclear power generation weighs heavily on their finances, and they have cited this as the main reason for raising electricity rates since the 2011 Great East Japan Earthquake.

Prime Minister Shinzo Abe says the nation is losing trillions of yen each year on additional fuel imports and that nuclear power is an economically advantageous source of energy that will be essential to keep the Japanese economy competitive.

Still, Abe’s new energy plan seems oblivious to the huge cost of a nuclear disaster like the Fukushima No. 1 accident. Tepco’s rehabilitation plan itself testifies to the costs — so huge that even the giant utility is unable to cover them on its own, thus requiring the injection of taxpayer money.

Tepco’s new rehabilitation plan calls for a ¥4.8 trillion reduction in its expenses over 10 years through such measures as introduction of more competitive bidding for materials procurement and voluntary retirement programs for 2,000 employees from the group workforce in fiscal 2014.

Tepco says it will reorganize itself into a holding company system and separate its power generation, transmission and retail businesses into three separate companies by April 2016, ahead of the schedule set by the power industry reform law enacted in 2013. It also plans to embark on the electricity retail business in parts of Japan that are currently serviced by other regional power monopolies when the second phase of the reform to liberalize electricity retail starts in 2016.

While further streamlining its operations, Tepco should explore these new avenues of business growth, rather than seek a return to its old model that depended on nuclear power for profitability.


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