Conclusion: The Japanese Situation

The Impetus for Deregulation

Several factors have contributed to the high cost of electricity in Japan. The first is the high cost of nuclear power, which, as we saw in previous chapters, requires very high initial investments. In Japan, as elsewhere, nuclear accidents have caused the public to be wary of nuclear power plants and to oppose their location near urban areas. This means that they have to be sited remotely and this adds to the transmission costs.[22] In addition, long lead times are lengthened even further by approval processes designed to ensure safety and reassure the public.

The GEUs have also spent much more on pollution control, maintenance and avoiding blackouts than companies in other parts of the world, especially deregulated companies in the US and Britain.[23] Avoiding blackouts is particularly expensive as Japan suffers from fluctuating electricity usage because of rising usage of electricity-hungry air-conditioning and heating that peaks in mid-summer and mid-winter. Because peak usage is so much higher than other times, some power plants are only used for a short time each day at certain times of the year.[24]

By the 1990s the rising yen mean that Japanese businesses, particularly manufacturing companies, were finding it hard to compete with foreign companies on international markets and they blamed high electricity prices for contributing to this situation.[25] However Hisao Kibune of the Department of Economics at Nagoya-Gakuin University notes that in in the period 1980-1993 Japanese electricity rates decreased by 13% whilst those in Western countries went up by 30-80% and when compared with the general cost of living in Japan, electricity rates were still falling in the early 1990s (see Figure 21.4).[26] In part this was achieved because rates reached an all time high following the oil crises in the 1970s, and subsequently dropped as oil prices went down again.[27] Similarly, The Economist stated in 1995 that “On a purchasing-power  basis, Japanese electricity prices compare well internationally.”[28]  Nevertheless, the story that Japanese electricity costs are much higher than the rest of the world helped  to promote the case for deregulation.

Additionally, companies found that they were able to produce electricity in-house at a cheaper rate that that charged by the GEUs. This was because fuel costs were declining due to the high yen, and in-house generation was not as capital-intensive as the nuclear power plants that the GEUs depended on. Additionally GEUs had to factor into their rates other costs such as transmission and distribution costs. Nevertheless it led Japanese business leaders to believe that deregulation would help lower costs. They claimed that the cost plus fair return did not provide incentives to reduce costs and increase efficiency in the way that competition would. They argued that competition would encourage more decentralised smaller scale electricity generating technologies to be developed. They also believed that safety regulations could be scaled back in a deregulated system, which would also save money.[29]

Deregulation was also driven in part by what has been called the “winds of deregulation” which were blowing worldwide as we have seen in earlier chapters of this book.[30]  Today Japan “considers deregulation a key to future economic success”.[31] This view has been encouraged by nations like the US that see business opportunities for their own corporations. For example, the US Trade Representative in 2000, Charlene Barshefsky, stated that deregulation measures in Japan, achieved under the US-Japan Enhanced Initiative on Deregulation and Competition Policy, “will translate into substantial gains for U.S. firms doing business in Japan” because lucrative markets would be opened to these US firms. She claimed that Japanese consumers would also benefit from the lower prices, greater choice and increased innovation that would result. With respect to electricity, “US firms would be able to produce, sell, and trade power in Japan’s $135 billion electric power market” and the lower electricity prices that would ensue would increase economic growth and create thousands of new jobs.[32] All promises familiar to readers of this book from those who advocate deregulation but promises that have consistently failed to materialise in the real world of electricity deregulation.

Deregulation

Deregulation in Japan has been fairly gradual. The first step towards deregulation, via amendments to the Electricity Utility Law in 1995,  was to allow the GEUs to buy electricity from outside sources including company in-house generators that generated more electricity than they needed and independent power producers (IPPs). A system of competitive tendering was introduced and approval conditions eased to facilitate this.[33] It was expected this would enable the GEUs to meet peak demand without building new capital-intensive power plants and to introduce competition into the wholesale electricity market. Additionally the utilities could seek tenders for construction of new power plants from a wider range of firms, including foreign firms.[34]

This was not a very satisfactory situation for newcomers to the market who were expected to compete with well-established GEUs by selling cheaper electricity to them. They could expect sales to be mainly at peak periods.  This did not offer much of an incentive to invest in new generating plant, so the new IPPs derive their power from surplus power from in-house generators.[35]

A further amendment to the Law in 1999 meant that from 2000 any electricity company could compete to supply customers using more than 2MW of electricity (see Figure 21.3). This amounted to just under one third of the market (30%). Electricity rates for these large customers were deregulated and transmission lines were opened up for access by third parties, although the GEUs that owned them still set the rates and conditions of their use. GEUs were still obliged to meet the energy demand of other consumers and to supply electricity to the contestable customers if the new companies failed or had a shortfall in their supply.[36]

Figure 21.3 Electricity Supply System in 2000

Adapted from: Toshihiko Furuya. Deregulation of the Electric Power Industry in Japan.
Washington: Tokyo Electric Power Company.

The GEUs were also now able to supply large customers in other regions but there was little competition between GEUs in this way.[37] The GEUs can also invest in other industries, as their counterparts in Europe and US can. The market was opened to electricity traders—companies like Enron—that buy and sell electricity but don’t necessarily produce it.[38] Nevertheless, Masanori Maruo, a utilities analyst with Deutsche Securities foresees that in the long term the number of utilities will be reduced as competition ‘weeds’ out the smaller electricity producers.[39]

Prices did drop after the 1999 amendment came into play but this can be attributed to lower interest rates, since the price decrease was for both contestable and uncontestable consumers and there were few new entrants into the market and “little revealed competition between the incumbents”.[40] Also the price drops can be seen as part of a longer trend of falling prices since the 1980s (see Figure 21.4) and as a strategy by the GEUs to undercut potential competitors, even before they get established.[41]

Figure 21.4 Average Electricity Prices for all Japanese Utilities

Source of data: Minoru Takahashi. ‘The Current Status of Electric Power Industry Deregulation in Japan and the Influence of the California Crisis.' Japan and the World Economy 14, 2002, p. 343; David Pilling. ‘Tepco Pre-Empts Dereguation with Price Cut.’ Financial Times. 1 October 2004, p. 9.

By 2001 there were 41 IPPs and 9 new entrants to retail supply called Power Producer & Suppliers (PPSs).[42] By the end of 2003 PPSs supplied less than 1 percent of the market (1.7 percent of the contestable market) and by October 2004 TEPCO, for instance, had only lost 1 percent of its electricity sales to competitors. Some customers avoided PPSs because of their inability to promise reliable supply because they lacked a backup supply in case of emergency.[43]

Because of the risks involved, newcomers to the market tend to have backers with deep pockets such as Diamond Power, owned by Mitsubishi, and Ennet, owned by Nippon Telegraph and Telephone (NTT). The only PPS proposing to build a major power plant at this stage is a joint venture of Tokyo Gas and Royal Dutch/Shell. [44]

A bill passed in 2003 will enable electricity suppliers to  compete from 2005 for customers using more than 50kW of electricity such as small and medium businesses and apartment buildings. This means almost two thirds (63%) of electricity sales will be contestable. Complete contestability, covering all consumers, is planned for 2007. An independent  organization will be set up to govern transmission and distribution, which will remain in the ownership of the ten GEUs.[45] Currently if two GEUs want to trade power they have to pay transmission fees to each of the GEUs geographically located between them and the price for this is set by the GEUs themselves.[46]

A Power Exchange will be soon established to facilitate wholesale trade and price setting. This is welcomed by the large GEUs which see it as a way of postponing the need to invest in new power plants.[47] They may also see an opportunity to use their market power to influence prices in the way large power companies have done in the US and Britain. It is also expected that some of Japan’s large trading companies such as Mitsubishi Corporation, Mitsui and Marubeni, will become involved in electricity trading.[48]

The Forecast

Whether householders and small businesses will gain from the deregulation of retail electricity supply remains to be seen. As we have seen in the rest of the book, in most places where electricity was deregulated, retail electricity prices increased, often dramatically, for households and small businesses. In particular where a power exchange is in place and there are a number of large powerful companies market manipulation has taken place and there is no reason to suppose that Japan will be immune from this phenomenon, once its power exchange is up and running.  Only an excess of supply would prevent this and it is evident that the rate of investment in power plants has slowed considerably with deregulation.

Service and reliability have also declined world wide in deregulated, privatised electricity systems because the service obligations of regulated electricity companies are replaced by short-term commercial goals. The emphasis on energy security and reliability, which was maintained at a high level by the GEUs, gave way to a concern with costs.[49] According to the International Energy Agency deregulation of the energy sector in Japan “has resulted in increasing cost sensitivity and conflicts between the objectives of economic efficiency, environmental protection and energy security.”[50] Capital investment in the sector has fallen.[51]

The supposed efficiency gains to be made by private, competitive companies, are usually made through short term cost savings, which include cutting the quality or level of service rather than offering the same level of service for less money. Sometimes return on investment has been increased by charging more for the service. Often cost savings have been made by  lowering rates of pay and conditions for workers and making thousands of electricity workers redundant. Full-time permanent employment has been increasingly replaced by part-time and temporary work.[52] In this way private enterprises may seem to be more efficient but the gains to shareholders are at the expense of workers and consumers, who suffer a decline in service levels.

Another easy way to cut costs, although short-sighted, is to cut safety, maintenance, training and research budgets. Old equipment is not regularly serviced nor replaced in advance of likely failure. As a result, accidents and equipment-related blackouts increase as do blackouts related to network congestion because planning and responsibility for network maintenance and development is not a market priority.

This is of particular concern for nuclear power stations.  In Japan the companies that own aging nuclear reactors are having to compete with newer companies that have cheaper sources of electricity and are so seeking to cut their own costs. One way of doing this is to reduce inspections or carry them out whilst the reactors are still operating, which is how the workers died in the Mihama plant accident in 2004.[53] The Japanese Citizen’s Nuclear Information Center said of the accident:

first lesson is that NISA and the Japanese power companies don't learn lessons, certainly not ones that are likely to cost them money. Profits are consistently given greater priority than safety. One would expect this tendency to be even more pronounced in a competitive electricity market.[54]

Blackouts have also increased worldwide as a result of lower reserve levels of generation capacity caused by the perverse incentives of the market system that give greater profits to private generating companies during times of electricity shortages. These perverse incentives not only discourage investment in new generation capacity but encourage withholding of electricity during times of peak demand to send prices higher.

Privatisation often occurs as a way of reducing public debt and the money raised from  electricity asset sales is often presented as if it is all bonus revenue for a government. However governments only gain in the long-term if the savings in interest repayments from reduced budget deficits, together with the tax payments from the new private companies, exceed the lost dividends, plus the additional costs resulting from market failures and  abuses of power  by the private companies. This is a dubious assumption at best.

J-Power is to be privatised and will be another competitor in the electricity generation market. The share floatation for the company, which is 83% owned by the government and 17% owned by the GEUs, is expected to yield $2 billion. The sale is expected to reduce Japan’s public debt, although the government will also lose the profits from the company.[55]

Private companies, freed from social obligations, are able to undertake profitable activities whilst the government continues to pay for unprofitable aspects of electricity supply like environmental protection and equitable access. Previously governments were able to subsidise the unprofitable activities with the profitable ones. The inability to spread costs across a whole service means more expense to taxpayers and savings to industry.

Nuclear power is expensive and requires government support. Nuclear waste  has to be stored or reprocessed. Reprocessed uranium is much more expensive than conventional uranium and the GEUs “have privately welcomed the public hostility to MOX fuel, promising not to introduce it against the wishes of local residents”.[56] Yet the government has invested billions of dollars (trillions of yen) in the project and has stockpiles of plutonium with no other use, apart from weapons.

When bankruptcies are threatened governments have to be prepared to step in and bail out private companies so as to secure the electricity supply, particularly when nuclear power stations are involved as has been seen with British Energy in the UK where the government is paying billions of dollars to keep it going.[57] Taxpayers clearly get the worst of both worlds. They no longer reap dividends from electricity production when it is profitable, but they still have to pick up the bill when it is not.

The folly of relying on markets for fostering renewable energy has been recognised in many countries with ‘liberalised’ electricity systems and governments are again resorting to regulations to increase renewable energy use. In California utilities are now required by the government to meet 20 percent of their supply with renewable sources.[58] Similarly in Japan, wind and solar power are minimal and their development depends on government support. When the market decides on the fuel source there is no incentive to take account of the environmental costs of that fuel source, nor does it take account of issues that have been important to the Japanese government such as reduced dependence on fuel imports.