Policy Subcommittee for Acceleration of Electricity System Reform: Concerns that the Reforms will help no one but TEPCO
It has become clear that TEPCO’s losses from the Fukushima Daiichi NPS accident will exceed 21.5 trillion yen. Since TEPCO alone is incapable of bearing such huge liabilities, METI has decided on the policy of levying a part of the compensation from consumers through their electricity bills. Concretely, this will mean levying the funds from power transmission fees. Thus, without taking any responsibility for what was afterall a ‘national policy’ of building nuclear reactors and claiming they were totally safe, the government now plans to have electricity users foot the bill for its own negligence.
METI says that, in exchange for the cost burden, it will take action such as creating a baseload power source market to stimulate the wholesale electric power market. By rights, the stimulation of the wholesale power market should be carried out through separation (separation of ownership) of power distribution to completely separate companies, but in Japan, since company split-up (legal separation under one company umbrella) is recognized, it is unlikely that the market will be stimulated. Unless this situation is changed, it is hard to imagine that a fully functioning baseload power source market would result even if were to be created.
The Policy Subcommittee for Acceleration of Electricity System Reform (hereinafter, the Subcommittee) has published its interim draft report.
The point of accelerating power system reforms is to create further choices for consumers and business opportunities for companies. What the report proposes are various policies geared toward that, together with financial accounting reforms under the pretext of solving problems facing electric power. More than accelerating reforms of the power system, however, it turns out the proposals would have the effect of rushing to TEPCO’s rescue.
The Subcommittee deliberated specific proposals in two working groups (WG), one focusing on creating markets for electricity and the other on financial accounting. The present report discusses the financial accounting reforms, which have a strong effect on consumers’ lives, while touching on the market creation issues.
The point of accelerating power system reforms is to create further choices for consumers and business opportunities for companies. What the report proposes are various policies geared toward that, together with financial accounting reforms under the pretext of solving problems facing electric power. More than accelerating reforms of the power system, however, it turns out the proposals would have the effect of rushing to TEPCO’s rescue.
The Subcommittee deliberated specific proposals in two working groups (WG), one focusing on creating markets for electricity and the other on financial accounting. The present report discusses the financial accounting reforms, which have a strong effect on consumers’ lives, while touching on the market creation issues.
Market Preparation Effects Limited
The report’s proposals primarily consist of establishing a baseload power source market and a non-fossil value trading market as a means of providing markets. The former would be a market for trading power sources such as coal power, nuclear power and large-scale hydropower, and the report says it would be created for the purpose of enabling new electric power to be procured from those sources. The latter would involve trading in the value of renewable energy and nuclear energy as non-fossil power sources. It is similar to the previously existing clean energy certificates, so theoretically, non-fossil energy sources would be introduced as a result of such purchases. The Ministry of Economy, Trade and Industry (METI) is seeking to achieve a 44% non-fossil energy source ratio by 2030, so they are trying to reach that goal through value trading.
From the start, if electric power were being actively purchased in the wholesale electric power market, there would be no need for anyone to go out of their way to create a baseload power source or non-fossil value markets.
In fact, Japan already has a wholesale electric power market, which was established in 2004 as the Japan Electric Power Exchange (JEPX). The electric power sales on this exchange, however, have never exceeded a tiny 2.6% of Japan’s total electric power sales (as of June 2016). This is way too low compared to Britain’s 51%, northern Europe’s 86% (both for FY2013) or France’s 25% (FY2015). The reason for this is that the old general electric power companies (below, the nine power companies—excluding Okinawa) offer almost none of their electric power on the market. They only offer surplus electric power as a minimal voluntary undertaking.
The separation of electric power generation and transmission to be implemented in 2020 is a legal separation. TEPCO is already anticipating this and taking on a legally separated form. Namely, they are splitting up into TEPCO Fuel & Power (thermal power generation), TEPCO Energy Partner (power distribution) and TEPCO Power Grid (power transmission), with TEPCO Holdings retaining their stock and controlling their management (the same company will retain the nuclear power plants as well). These companies will act strongly according to TEPCO Holdings’ intentions, threatening the neutrality of the power transmission division. The other nine power companies will probably follow suit.
Legally speaking, the right of ownership is supposed to be separated and divided completely among independent companies. If this is not done, deals among the split-up companies will take center stage, and even after the legal separation of power generation and transmission, it is difficult to imagine the wholesale electric power market being stimulated by it.
It seems that METI cannot force the nine power companies to provide their power to the markets. Thus, it has decided to make the markets it has created functional by offering to shift part of the burden of paying compensation for damages onto consumers’ shoulders, as will be described below. Shifting the cost of compensation to consumers would incentivize TEPCO, but how does it intend to get the rest of the nine power companies to follow suit to make the markets functional?
The report’s proposals primarily consist of establishing a baseload power source market and a non-fossil value trading market as a means of providing markets. The former would be a market for trading power sources such as coal power, nuclear power and large-scale hydropower, and the report says it would be created for the purpose of enabling new electric power to be procured from those sources. The latter would involve trading in the value of renewable energy and nuclear energy as non-fossil power sources. It is similar to the previously existing clean energy certificates, so theoretically, non-fossil energy sources would be introduced as a result of such purchases. The Ministry of Economy, Trade and Industry (METI) is seeking to achieve a 44% non-fossil energy source ratio by 2030, so they are trying to reach that goal through value trading.
From the start, if electric power were being actively purchased in the wholesale electric power market, there would be no need for anyone to go out of their way to create a baseload power source or non-fossil value markets.
In fact, Japan already has a wholesale electric power market, which was established in 2004 as the Japan Electric Power Exchange (JEPX). The electric power sales on this exchange, however, have never exceeded a tiny 2.6% of Japan’s total electric power sales (as of June 2016). This is way too low compared to Britain’s 51%, northern Europe’s 86% (both for FY2013) or France’s 25% (FY2015). The reason for this is that the old general electric power companies (below, the nine power companies—excluding Okinawa) offer almost none of their electric power on the market. They only offer surplus electric power as a minimal voluntary undertaking.
The separation of electric power generation and transmission to be implemented in 2020 is a legal separation. TEPCO is already anticipating this and taking on a legally separated form. Namely, they are splitting up into TEPCO Fuel & Power (thermal power generation), TEPCO Energy Partner (power distribution) and TEPCO Power Grid (power transmission), with TEPCO Holdings retaining their stock and controlling their management (the same company will retain the nuclear power plants as well). These companies will act strongly according to TEPCO Holdings’ intentions, threatening the neutrality of the power transmission division. The other nine power companies will probably follow suit.
Legally speaking, the right of ownership is supposed to be separated and divided completely among independent companies. If this is not done, deals among the split-up companies will take center stage, and even after the legal separation of power generation and transmission, it is difficult to imagine the wholesale electric power market being stimulated by it.
It seems that METI cannot force the nine power companies to provide their power to the markets. Thus, it has decided to make the markets it has created functional by offering to shift part of the burden of paying compensation for damages onto consumers’ shoulders, as will be described below. Shifting the cost of compensation to consumers would incentivize TEPCO, but how does it intend to get the rest of the nine power companies to follow suit to make the markets functional?
New accounting system will not promote reactor decommissioning
The financial accounting WG proposed a decommissioning accounting system and compensation mechanism. Both proposals merely relate to changes in electricity business accounting rules, and neither has any real relevance.
The decommissioning accounting system aims at increasing the incentives for decommissioning and reducing Japan’s degree of dependence on nuclear power as put forward in Japan’s Basic Energy Plan. It was previously revised in 2013 and 2015, and modifications this time are said to be minor. To summarize them, if a reactor is decommissioned after 40 years of operation or earlier, related facilities that will continue being used after the decommissioning (such as spent fuel pools) would not be removed at the same time as the reactor, but would continue to depreciate as assets. The transmission division would be allowed to recover the cost of that depreciation. Also, while as a general rule, the funds needed for reactor decommissioning are set aside and accrued for 40 years, any deficiencies could also be recovered by the transmission division. In other words, through these revisions, they are trying to pass the burden to all power consumers through transmission fees. This extremely peculiar accounting system for electric companies is the target of strong criticism, and it seems doubtful anyhow that introducing this system will promote decommissioning. Permission to extend the operating periods of the Takahama Unit 1 and 2 reactors beyond 40 years was sought and granted, followed by Mihama Unit 3. It is clear that the nine power companies are aiming for 60-year operating periods.
The financial accounting WG proposed a decommissioning accounting system and compensation mechanism. Both proposals merely relate to changes in electricity business accounting rules, and neither has any real relevance.
The decommissioning accounting system aims at increasing the incentives for decommissioning and reducing Japan’s degree of dependence on nuclear power as put forward in Japan’s Basic Energy Plan. It was previously revised in 2013 and 2015, and modifications this time are said to be minor. To summarize them, if a reactor is decommissioned after 40 years of operation or earlier, related facilities that will continue being used after the decommissioning (such as spent fuel pools) would not be removed at the same time as the reactor, but would continue to depreciate as assets. The transmission division would be allowed to recover the cost of that depreciation. Also, while as a general rule, the funds needed for reactor decommissioning are set aside and accrued for 40 years, any deficiencies could also be recovered by the transmission division. In other words, through these revisions, they are trying to pass the burden to all power consumers through transmission fees. This extremely peculiar accounting system for electric companies is the target of strong criticism, and it seems doubtful anyhow that introducing this system will promote decommissioning. Permission to extend the operating periods of the Takahama Unit 1 and 2 reactors beyond 40 years was sought and granted, followed by Mihama Unit 3. It is clear that the nine power companies are aiming for 60-year operating periods.
Foremost Goal to Have Consumers Bear the Cost of Rescuing TEPCO
The report proposes having consumers bear the burdens of providing compensation for nuclear accidents and securing funds for decommissioning the Fukushima Daiichi NPP reactors. That right there is the biggest goal of this draft report. The report does not touch upon increased costs of compensation for the Fukushima nuclear accident and decommissioning of the reactors, it just talks about the system. It was indicated at the “Committee on TEPCO Reform and the 1F Problem (TEPCO Committee)” meeting that the cost increases would not be revealed to the public, but the way those costs would be borne was indicated. “1F” means “the Fukushima Daiichi NPP.” There was only one page of reference material, but the Subcommittee issued its report in line with it.
According to the reference material, the funding that needed to be secured had been reassessed at 8 trillion yen for dealing with the “1F” reactors and water contamination countermeasures (an increase of 6 trillion yen), plus 7.9 trillion yen for compensation (an increase of 2.5 trillion yen), plus 5.6 trillion yen for decontamination and interim storage costs (an increase of 2 trillion yen).
Among the above, the funds for reactor and water contamination countermeasures are being placed in a reserve fund from TEPCO Holdings’ profits, but it is the transmission division (TEPCO Power Grid) that is generating steady profits. Rate-of-return regulation will continue applying to the transmission division even after liberalization, so METI says its profitability will remain assured. They explain that the costs of decommissioning will not be incorporated into transmission fees, so these will not rise above their current level, but recognize that although the fees are supposed to decrease as a result of liberalization, it is possible they will remain high. The government will pay for the costs of decontamination and interim storage, earmarking funds as in the past from future sales of TEPCO stocks that it purchased for 1 trillion yen.
The problem is the cost of compensation. METI abruptly turned this problem around to one concerning the nature of the “burden of providing for past liabilities that should have been secured prior to the accident.” This is an amazingly irresponsible act of duplicity for a government that created policies under the assumption that no accident would occur. In the future, too, when the largest possible accident could far exceed the Fukushima accident, how should they ensure sufficient funds for compensation? They use preposterous logic, but by introducing this “past liabilities” they organize it in a way that even forces the burden onto consumers who have switched to new power companies. Specifically, they will recover the increased part of the costs through transmission fees (the TEPCO Committee gave it as 2.5 trillion yen, but the present report estimates it at 2.4 billion yen).
It is estimated that these “past liabilities” can be paid off by adding about 18 yen per month onto the electric power consumption bills of ordinary households. In addition, there is detailed annotation explaining that there is also an indirect burden on the industrial sector. The period for recovery of costs is estimated to be 40 years, requiring households to continue paying each month for 40 years. The calculation method also lacks logic, and on the basis of the installed capacity as of FY2015, it would only make sense if the figures were deliberately fudged to come up with the 2.4 trillion yen.
If they had been told after the accident that the funds should have been secured beforehand, the consuming public would feel horrified by such facilities and not want anything to do with them.
All of these proposals have been put forward as TEPCO-rescue policies for promoting the company’s continued existence. Critical voices are rising anew that what would be proper in this case would be prioritizing the dissolution of TEPCO (legal liquidation). This framework that rescues TEPCO without requiring it or its major stockholders to bear any burden, but instead makes the consuming public pay, must be rejected.
METI, in its pursuit of reforming the electricity market, realized it could not do so through force, but that the accounting rules could definitely be changed to shift the burden of compensation costs onto consumers, purportedly to stimulate markets. However, in the end, won’t the proposals only have the effect of achieving TEPCO’s rescue?
The report proposes having consumers bear the burdens of providing compensation for nuclear accidents and securing funds for decommissioning the Fukushima Daiichi NPP reactors. That right there is the biggest goal of this draft report. The report does not touch upon increased costs of compensation for the Fukushima nuclear accident and decommissioning of the reactors, it just talks about the system. It was indicated at the “Committee on TEPCO Reform and the 1F Problem (TEPCO Committee)” meeting that the cost increases would not be revealed to the public, but the way those costs would be borne was indicated. “1F” means “the Fukushima Daiichi NPP.” There was only one page of reference material, but the Subcommittee issued its report in line with it.
According to the reference material, the funding that needed to be secured had been reassessed at 8 trillion yen for dealing with the “1F” reactors and water contamination countermeasures (an increase of 6 trillion yen), plus 7.9 trillion yen for compensation (an increase of 2.5 trillion yen), plus 5.6 trillion yen for decontamination and interim storage costs (an increase of 2 trillion yen).
Among the above, the funds for reactor and water contamination countermeasures are being placed in a reserve fund from TEPCO Holdings’ profits, but it is the transmission division (TEPCO Power Grid) that is generating steady profits. Rate-of-return regulation will continue applying to the transmission division even after liberalization, so METI says its profitability will remain assured. They explain that the costs of decommissioning will not be incorporated into transmission fees, so these will not rise above their current level, but recognize that although the fees are supposed to decrease as a result of liberalization, it is possible they will remain high. The government will pay for the costs of decontamination and interim storage, earmarking funds as in the past from future sales of TEPCO stocks that it purchased for 1 trillion yen.
The problem is the cost of compensation. METI abruptly turned this problem around to one concerning the nature of the “burden of providing for past liabilities that should have been secured prior to the accident.” This is an amazingly irresponsible act of duplicity for a government that created policies under the assumption that no accident would occur. In the future, too, when the largest possible accident could far exceed the Fukushima accident, how should they ensure sufficient funds for compensation? They use preposterous logic, but by introducing this “past liabilities” they organize it in a way that even forces the burden onto consumers who have switched to new power companies. Specifically, they will recover the increased part of the costs through transmission fees (the TEPCO Committee gave it as 2.5 trillion yen, but the present report estimates it at 2.4 billion yen).
It is estimated that these “past liabilities” can be paid off by adding about 18 yen per month onto the electric power consumption bills of ordinary households. In addition, there is detailed annotation explaining that there is also an indirect burden on the industrial sector. The period for recovery of costs is estimated to be 40 years, requiring households to continue paying each month for 40 years. The calculation method also lacks logic, and on the basis of the installed capacity as of FY2015, it would only make sense if the figures were deliberately fudged to come up with the 2.4 trillion yen.
If they had been told after the accident that the funds should have been secured beforehand, the consuming public would feel horrified by such facilities and not want anything to do with them.
All of these proposals have been put forward as TEPCO-rescue policies for promoting the company’s continued existence. Critical voices are rising anew that what would be proper in this case would be prioritizing the dissolution of TEPCO (legal liquidation). This framework that rescues TEPCO without requiring it or its major stockholders to bear any burden, but instead makes the consuming public pay, must be rejected.
METI, in its pursuit of reforming the electricity market, realized it could not do so through force, but that the accounting rules could definitely be changed to shift the burden of compensation costs onto consumers, purportedly to stimulate markets. However, in the end, won’t the proposals only have the effect of achieving TEPCO’s rescue?
<Hideyuki Ban, CNIC Co-Director>
