Since World War II, Japan's electricity has been supplied under a monopoly system by a small number of large electric power companies.However, in 1995 the Electric Utilities Industry Law (EUIL) was revised and, for the first time, change came to the system through the establishment of new Independent Power Producers (IPP) and Power Producers and Suppliers (PPS). But the former was strictly limited to wholesale supply to the electric power companies and the latter is restricted to certain geographical areas.

Since then, there has been growing criticism that international competitiveness is being weakened due to the fact that electricity rates in Japan are higher than rates overseas. Consequently the EUIL was revised again in 2000 and a 'Power Producers and Suppliers' system was established. Through this system it has at last become possible for consumers to choose suppliers other than the electric power companies, although this right is restricted to large-scale consumers. This is the beginning of partial liberalization.

Just one year later, in 2001, in order to confirm and reappraise the progress of the system, an inquiry process began to further revise the EUIL.

Then, last year, on 27 December, after long drawn out discussions between the government, whose objective is to stimulate the economy through reduced electricity price, and the electricity companies, who want to preserve the monopolistic system, the Electric Utilities Subcommittee in the Advisory Committee for Natural Resources and Energy finally settled on the contents of its report. A bill to amend the EUIL had already been introduced in March and it is scheduled to come into operation around June.

Concerning the Contents

It was made clear from the beginning that this report would be based on the principles of the Basic Energy Policy Law (BEPL), sometimes referred to as the 'Law to Foist Nuclear Energy Upon Us'. As can be seen from the title, 'Framework for a Desirable Electricity Industry System for the Future,' the report is in fact nothing more than a big policy statement. The fine details will be debated for another couple of years, but we have already seen the following developments.

Firstly, although it is only an incremental step, the scope of liberalization is for contracted power of at least 50 kilowatts -- for example, for convenience stores and office buildings. Debate regarding liberalization for general households (full liberalization) is scheduled to begin in 2007. However, this sector uses a larger amount of power than the Ultra High Voltage sector which is the target of liberalization. It represents around 254.5 billion kilowatt hours and 70 million contracts, so it will have a very big impact on the electric power companies. Consequently, it can be expected that there will be some fierce debate over this in future. The scope and schedule of this electricity liberalization process is shown in the table (page 6).

As part of the new regulatory system, a neutral body to set rules and to monitor the transmission and distribution sectors has been established. It was established because until now the electric power companies set and applied the rules themselves and this had a negative impact on new entrants. Name, membership, etc., haven't been determined yet, but it's assumed that it will be an incorporated body.

Further, rules to activate the distribution of electricity on a national scale have been decided upon. One element of this is that the rules whereby charges were applied each time a supply boundary was crossed will be revised. This supply transfer system was a great burden to new entrants. There will be a single rate for the use of the transmission line, regardless of whether the transaction is inside or outside the supply area.

One more element will be to create a national-scale wholesale electrical power market. Hitherto there was a regional monopoly structure premised upon an overall cost formula. Consequently anticipated demand and investment risk could be calculated with some ease. But from now on, if liberalization progresses, this monopoly system will fall apart. It will therefore be necessary to refine a pricing system based on different methods of judging electrical power development investment and to perfect a method of selling and providing power in situations where there is a mismatch between supply and demand.

But these elements indicate nothing more than that the rules have been established. Until one actually attempts to put it into practice, its effectiveness will not become clear.

The Treatment of Nuclear Energy

In the case of nuclear energy, it is expected that newly installed nuclear power plants will be affected. But there was virtually no such discussion in the subcommittee. The discussions of the liberalization of electrical power took long enough, but the fact that they were brought together comparatively well was, in the end, probably due to the fact that the nuclear energy issue was deferred for future consideration.

However, although it wasn't taken up as a theme for discussion, the following comments were included in the report: 'It is necessary to investigate and prepare appropriate rules and measures, both from the perspective of facilitating the promotion of nuclear power stations and backend enterprises, as has always been the case, and also from the perspective of creating a favorable investment environment. For this purpose, a place should be created for the analysis and assessment of the total cost structure of backend enterprises and of the profitability of nuclear power stations. Then, on the basis of the results obtained, the method of allocating administrative responsibilities should be sorted out and adjustments to the existing system, etc should be made. The aim should be to investigate the economic measures etc and the type of concrete systems and steps that are necessary, including how necessary they are, by the end of 2005.'

In Britain the private nuclear energy company British Energy is in danger of becoming insolvent. This is partly due to the fall in wholesale prices caused by the electricity trading system, but it is also thought that another cause is the fact that the company entered into contracts to recycle nuclear waste. This process is actually more expensive than direct disposal of the waste. With previous examples like this, the discussion of how to treat nuclear power within the market is likely to be decided in accordance with the interests of the proponents of nuclear power a few years after electricity trading gets underway.

Looked at it from this perspective, not just in regard to electricity liberalization, but also in regard to the incidents of falsification of nuclear data and the subsequent discussion about maintenance standards, although at first glance they all seem to be being discussed as separate issues, one begins to realize that their consequences are being calculated in a very long-term and careful manner.

Final Comments

Just because the direction of liberalisation has been decided, that doesn't mean there's nothing left to worry about. It's too soon to conclude that everything will run smoothly if you leave it to the market. The market will work if those who already wield huge power, the electric power companies, cooperate.

Another concern is whether what appears at first glance to be a relaxing of regulations could actually end up leading to a tightening of regulations. It is the Ministry of Economy, Trade and Industry (METI) that is proposing this policy. But it will also be the METI that will regulate electricity liberalization. It follows that a system may be being created in which the proponent of the policy will find it easy to tighten the regulations. As the report now stands, the electricity companies' responsibilities are pointed up, but the state's responsibilities are hardly mentioned at all.