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Electric Power Market Reform in Japan-Electric Power Market Reform in Japan-Update and Some Points for FutureUpdate and Some Points for Future

October 2001

Takanobu YASUNAGAMinistry of Economy, Trade and Industry

Agency of Natural Resources and Energy

Electricity and Gas Industry Department

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Presentation Contents1.Electric Power Market Reform in Japan to Date 2.Key Points of the Current System (Partial Liberalization) 3. Progress Review

Power Rates Reduction New Entrants Progress in Electric Power Bidding

4.Verification of the results of the current reform competition and new entrants ensuring the access to the network

5.Perspective of electric power market reform revisit of the primary objectives of reform reform approaches lessons from the California Power Crisis

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1. Electric Power Market Reform in Japan to Date

Part of structural reform of Japanese economy to correct the high-cost structure

Introduction of competitive forces into the electric utility system

Introduction of the 1995 bidding system for wholesale supply → Shift to full-scale bidding system for thermal power sources

Partial deregulation of retail supply began in March, 2000.

Review after 3 years

May 1999 Bill for Electric Power Market Reform Passed・ Proclaimed

May 1997 The Action Plan for Changes and Regeneration of Economic Structure ○For electricity and gas industry, our aim is to obtain a cost level that is in no way inferior to global level by 2001 and review the overall state of electricity industry in Japan.

July 1997 Setting up of the Subcommittee of Basic Policy Directions Electricity Utility Industry Council○Mardate from the Minister“In order to obtain a global cost level by 2001 and provide a basis for mid to long-termreduction in electric power costs in Japan, how should we design future electricity industry?”

January 21 1999 Report by Subcommittee for Basic Policy Directions・Interim Report by Subcommittee on the Rate System “～ Basic Report”○Partial deregulation of retail supply○Relaxation of the price regulations(introduction of a notification system for rate reduction, diversification of rate menus)○Future review: Approximately 3 years after implementation of the system

December 2,1999 Report by Subcommittee of Basic Policy Directions ・Interim Report by Subcommittee on the Rate System “～ Report on the System○Rules for Wheeling Service○Rules for Relaxation of the price regulation○Guidance for Fair Electricity Transaction○Guidelines for Information Disclosure○Guidelines for Troubleshooting

December 24・ 27 1999 Notification of Wheeling Contract was submitted by Electric Power Companies

March 21, 2000 Enforcement of New System

Review: Approximately 3 years after the implementation of the system

（※） August 2000　 　 　 Competitive bidding for power procurement in the government office started with Ministry of Economy, Trade and Industry implementing the first bidding.

October 2000 Revision of Wheeling Contract drawn up by Electric Power Companies

Before Partial DeregulationAfter Partial Deregulation

(new system)

【 Starting March 21, 2000 　】

Electric Power Company Electric Power Company

Department Store, Large Hospital, Large Office Building, etc.

Large Factories, etc.

New Entrants

Rate Control Rate Control Free Rates (competitive)

Power Plant

Power Lines

Power Plant Power Plant

Electric Power

Company’s Power Line

（ Companies outside the supply area included)

Department Store, Large Hospital, Large Office Building, etc.

Large Factories, etc.

Household Small to Medium Factories, etc.

Office Bldg ・Shopping Arcade, etc.

Household Small to Medium Factories, etc.

Office Bldg ・Shopping Arcade, etc.

“Guideline for Fair Power Trade” compiled jointly by the Ministry of Economy, Trade and Industry and the Fair Trade Commission

Electric Power Company reports the wheeling rates to the Ministry of Economy, Trade and Industry.

Large Consumers (about 30% of the

total)

Large Consumers (about 30% of the

total)

Introduction of Notification System when Lowering Rates

Deregulation of Option Menu

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2. Key Points on Current Partial Liberalisation

Common methods as used in electric power reform in other countries: Introduction of competitive forces in the power generation and retail sectors through securing open access to the networks

Electric power utilities keep owning and managing the networks and provide wheeling services.

Regulatory organisation shall post-monitor the implementation of wheeling rates and contracts.

Establishment of competitive conditions by implementing the Guidelines on Fair Electricity Transactions

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3. Progress Review(1) Power Rates Reduction(October 2000)

Non-Deregulated Sector → Reduction by an average of 5.42% by 10 companies

Wheeling Service Rates → Reduction by an average of 7.3% by 10

companies

Expansion of Optional Contracts → Expansion from 158 to 234 provisions

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Efforts by Electric Utilities to Reduce Supply Costs

Each　company　is　making　an　effort　to　improve　their　own　financial　conditions Reduction　of　depreciation　cost　by　

streamlining　investments　in　plant　and　equipment

Reducing　repair　costs　by　efficiently　operating　equipment

Reduction　of　interest-payment　costs　by　repaying　interest-bearing　liabilities

Pursuant　to　Efficiency　Improvement　Plan　that　utilities　have　announced　　(3　to　5　year　rolling　plan),　they　continue　to　improve　capital　ratio　and　reduce　interest-bearing　liabilities.

Cost Brekdown in Electricity Utility Industry(total of 10 electric power companies on a cost basis・ )

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

1989 1993 1996 1997 1998 1999

Fuel Cost

Power PurchasingCost

Depreciation Cost

Interest Payment

Repair Cost

Personnel Cost

Consignment Cost

Overhe a dExpenses

Tax

11.2%

17.1.%

9.4%

11.5%

10.8%

11.3%

9.4%

12.3%

10.5%

17.3%

10.5%

13.9%

10.8%

3.9%

12.2%

8.7%

13.3%

11.2%

19.4%

9.3%

12.4%

11.4%

3.6%

10.8%

8.6%

12.3%

11.1%

19.7%

9.2%

12.3%

3.6%

10.7%

11..5%

19.8%

8.6%

11.9%

12.8%

3.7%

11.9%

9.1%

11.3%

11.2%

3.7%

(100 million yen)

16.2%

11.8%12.2%

11.8%

7.7%

19.3%

8.8% 8.0%

11.1% 15.0% 3.0%

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3. Progress Review (2)State of New Entrants to the Market

At present, there are 9 new entrants (companies filed notifications as “Electric Company of Specified Scale” based on the Electric Utility Law-as of July 2001).

Diamond Power Corporation, Marubeni Corp., Asahi Glass Co.,Ltd., eREX CO.,LTD., NIPPON STEEL CORPORATION, ENNET CORPORATION, SUMMIT ENERGY CORPORATION, Daio Paper Corp., Sanix

Inc. (in the order of notification) Of these, 6 companies have started supplying. There are companies other than the 9 mentioned

above that have expressed their intention of entry.

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３． Progress Review （２）　 Share of the new entrants in liberalized market

・ This figure is based on the actual results from August 2000(A new entrant started to supply) to May 2001.

・ Because four new entrants started to supply in April 2001, the share of the new entrants expanded from 0.08% to 0.2%.

May 2001Newent rant s0. 2%

Aug. Sep. Oct. Nov. Dec. J an. Feb. Mar. Apr. May10 GeneralElectricUtilities 19,114 19,157 18,901 18,072 18,035 17,504 16,894 18,056 17,238 17,778Newentrants 11 11 10 15 15 14 14 16 36 42

Total 19,125 19,168 18,911 18,087 18,050 17,518 16,907 18,071 17,275 17,820The share ofthe newentrants（％） 0.06 0.06 0.05 0.08 0.08 0.08 0.08 0.09 0.21 0.24

Aug. 2000

Newent rant s0. 06%

（ Unit ： 100,000kw ）

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３． Progress Review （２）　 New investment plan by new entrants

After the start of the partial liberalized system, new entrants came to bear new investment.

New investment is very important to maintain the competition momentum.

At the present, the prospects for new investment are limited. ENNET Ibaraki(210,000kw 、 July 2001 ～）　　　　　　 　 Chiba （ 100,000kw 、 April 2003 ～）　　　　　　 Chiba （ 100,000kw 、 Fall 2003 ～） Sanix 　 Hokkaido （ 74,000kw 、 August 2002 ～）

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3. Progress Review (3)Progress in Electric Power Bidding

Since August 2000, under then-the Ministry of

International Trade and Industry, at least 8 central/local

governments have invited bids for electric power

procurement, mainly for their government buildings

(old service areas of Tokyo, Chubu, Kansai and Kyushu).

There are some cases where private enterprises

requested the bids.

For public bidding, there has been a reduction of up to 20% in the contracted price compared to past electric power expenses.

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3. Progress Review (4) Development of Decentralized Electricity Source Supply Services

Independent companies are preceding.

Utility companies are also reinforcing their operations.

Electric　Power　

Company　

Company　Name　 %　of　Capital　Injection　

Capital　(100　million　

yen)　

Hokkaido　 Energy　Frontier　 ５５　 １　

Tohoku　 Tohoku　Energy　Services　

１０　 ３　

Tokyo　 My　Energy　 ５７　 １０　　

Chubu　 C　Energy　 ５８　 ４　

Kansai　 Kanden　GASCO　 ９０　 ４　

Kyushu　 NEECO　 ７５　 ４１　

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3. Progress Review (5) Government Measures-Securing Market Competition

Execution of market monitoring in the liberalized sector Implementation of a survey on the price (every April and

September) Publication of a collection of consultation and dispute cases, such as wheeling supply issues between electric power companies and new

entrants.

Securing conditions for fair competition through cooperation with the Fair Trade Commission

Inspection against possible cross-subsidization in electric power companies through an audit of both regulated and liberalized activities

Ex-post review of the appropriateness of the wheeling revenue/ expenditure

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Government Measures (1): Price Monitoring for Large Consumers

Survey on the electric power prices and supply sources for large consumers that are subject to liberalisation (about 6600)

Findings from the first price survey for the period of April to September 2000 (quarterly data), were made public in January 2001 (flash report).

The survey for the period from October 2000 to March 2001 is under way and the result will be available around June.

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Trend of Electric Power Price

Power Rates and Whol esal e Pri ce I ndex(Rate of Change based on 1992 as 100)

86889092949698

100102

1992 1993 1994 1995 1996 1997 1998 1999

Power RatesＷＰＩ

（％）

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Government Measures (2): Publication of a collection of consultation and dispute cases, etc.

Monitoring market players through hearings and consultation of new entrants and utility companies.

Information Dissemination of cases such as consultation and legal interpretations through the official Web site of the Ministry of Economy, Trade and Industry (hereinafter referred to as METI) . This informative data is accessible at any time.

Open access to the network － receive comments on the wheeling service contract, and its implementation

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Government Measures (3) ：Transparency of the Market Transparency － For new entrants and

investors, this is the basis for “trust” in the electric power

market. Publication of views based on the Anti-monopoly

Law on issues such as:1)securing power sources by new comers; 2) opening the economic power interchange system by the Central Electricity Council to non-utility companies; 3)joint supply by utility and new entrant.

Contribute to the transparency of the market by disclosing responses from electric power companies concerning the capacity of wheeling supply.

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４． Verification of the results of the current reform (1) Competition and new entry

Efforts to improve efficiency and lower prices as a result of increased pressure from competition

Improved services to customerRate of consumers changing their suppliersDevelopment and prospects of new

entrants’ investment in electric sourcesDevelopment and prospects of competition

among electric power companies

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Transparency of the wheeling system－ trust in the market

Efforts and performance of the electric power companies to open access

Objective evaluation including the market participants

Post-monitoring system - Effectiveness of regulatory system

Results of new economic power interchange system

４． Verification of the results of the current reform (2) Securing access to the network

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5. Perspective of Electric Power Market Reform (1)Revisit of the Primary Objectives of Reform

Maintenance of industrial competitiveness and enhancement of consumer benefits through reduction in infrastructure cost

Creation of new growth sectors by increasing productivity

Realisation of an electric power investment system that corresponds to a new demand structure and technological development

Achievement of industrial structure and enterprise governance that is able to meet the changing business environment and market expectations flexibly

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5. Perspective of Electric Power Market Reform (2)

Reform Approaches

The basic principle in Japanese reform of promoting competition through securing open access to the network remains unchanged.

What is requested is not simple “liberalisation” or “deregulation”, but the concept of “institutional reform” or “regulatory reform” that pro-actively designs a system to make market mechanism function properly.

Report of Electricity Industry Council : Based on the objective review of :performance of partial liberalisation; state of overseas deregulation and; possible impact on the public interest, it should be assessed whether or not to take policy options such as 1)expansion of the scope of partial liberalisation, 2)full-scale liberalisation, and 3) a power pool market.

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Lessons from the California Power Crisis (1) External　Factors

High　growth　in　demand,　strict　environmental　regulation,　the　　natural　gas　price　hike,　and　water　shortage

Systemic　Problems Structural　deficiency　to　

provide　adequate　power　supply

Electric　power　companies　found　themselves　difficult　to　have　risk　hedge　measures

Fragile　system　that　is　unable　to　cope　with　tight　demand-supply

Background　for　confusion Reform　born　out　of　political　

compromise　between　special　interest　groups

Dual　power　structure　of　state　and　federal　governments

Power　Price　Condition　in　California Day　ahead（market)

0

100

200

300

400

October January April July October January

wholesale power price(dollar/

Ｐｘ

ＭＷ

h）

Constrction of New Thermal Power Plant in California

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

199019911992199319941995199619971998199920002001200220032004

InOperation

Approved

Applied

MW

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Lessons from the California Power Crisis (2)

《 Points　for　Future　System　Reform　 》

1.　　System　that　enables　a　smooth　new　　investment　

2.　　Danger　of　careless　and　　inflexible　price　regulation　

３． Limitations　on　　risk　management　may　endanger　

stable　supply

４． Impact　of　environmental　regulations　on　

investment

５． Decentralized　power　generation　as　alternatives

6.　Structure　to　secure　stable　system　operation　of　

electric　power　in　harmony　with　electricity　market　

7.　　Scheme　to　encourage　flexible　demand　reaction　to　　

price　changes　in　electricity

8.　Issues　of　market　power　in　the　electricity

9.　　Governance　of　power　system　operation

Power　Generation　Capacity　of　California　and　PJ M

96

98

100

102

104

106

1988 1993 1995 1996 1997 1998 1999

Pensilvania

California

1993=100

Potential　Investment　in　Plant　and　Equipment　in　theU.S.A.

0

20,000

40,000

60,000

80,000

2000 2001 2002

MW

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Lessons from the California Power Crisis (3)“Current Overseas Electricity Reforms and Challenges for System Reform”(from　the　METI　Report　　April　19,　2001)

Electric power system is subject to various external changes regardless of the presence of deregulation. It is necessary for people involved to pay

constant attention to these changes and respond to them flexibly when necessary. Failure in electric power market reform gives rise to

serious crises like the one in California. We should take the greatest care when

designing future systems. It is quite useful for us to assimilate and absorb

experiences from reforms in other countries and regions including California.

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Electric power market reform and corporate strategy

It is inevitable for corporate performance to be called into question aimed calls for transparency and accountability in the capital market.

Network and Competitive Sectors - Business models are getting diversified.

Expertise of the people working in the electric power business - Their market value should remain unchanged under any system.

System reform is a catalyst - Through internalizing the system reform, it is highly feasible to raise corporate competitiveness in the electricity industry- Win-Win strategy is possible.