Power firms profit most from homes

Kyodo

A government study on profit structures at 10 power companies shows that the regional monopolies derive most of their profits from the regulated market for households while keeping down charges in the competitive market for big companies and other large-lot users.

Between fiscal 2006 and 2010, they earned 69 percent of their aggregate profit from households, which account for 38 percent of power sales by volume, according to the results of the research unveiled Wednesday by the Ministry of Economy, Trade and Industry.

The revelation will likely add force to criticism of Tokyo Electric Power Co.’s plan to raise home electricity rates. Tepco, the country’s biggest utility, is in bad financial shape. It faces growing fuel costs after shutting down its nuclear power plants amid the Fukushima disaster, and staggering compensation costs over the crisis alone.

Calls on the government to accelerate talks on liberalizing the power sales market may also intensify, but power companies may resist any moves for radical market reforms.

Hisa Anan, head of the secretariat of the Shodanren consumer group, was angered by the study’s revelation.

“It’s terrible,” Anan said. “Why do they single-handedly set high prices when we are not given an option to choose?”

Anan took part Wednesday in a METI meeting of experts examining Tepco’s rate hike plan.

The ministry presented research that showed that among the 10 power companies, Tepco earned an average of 91 percent of its profits from its power business by selling electricity to homes between fiscal 2006 and 2010. The other nine power companies derived between 54 and 90 percent of their profit from homes.

The government allows companies with power-generating capacities — such as steelmakers and chemical companies — to sell electricity in the competitive market for large-lot business users. In this market, charges are determined through negotiations between supplier and consumer.

In the face of competition, Tepco, is believed to have come up with a menu of varying discounts for certain time frames during the day or season, depending on the length of contract periods.

In contrast, the government has not allowed other power suppliers to enter the regulated market for homes, convenience stores and small factories. With no competition, prices remain rigid.

Tepco’s 10 biggest large-lot users pay on average of ¥11.8 per kilowatt, half what the household sector pays.

Profits from the large-lot user sector tend to be thinner due partly to the way costs are factored in.

Under the tariff computation rules for power companies, charges for large-lot users are structured to reflect fuel costs more in line with their ups and downs than in the household sector.

Thus, recent sharp increases in the prices of crude oil and liquefied natural gas have likely eaten into Tepco’s profit from the competitive market.

Also exerting downward pressure on profit is Tepco’s increased reliance on thermal power generation, which started with the complete shutdown of its seven-reactor Kashiwazaki-Kariwa Nuclear Power Station, the world’s biggest nuclear plant, after a magnitude-6.8 earthquake off the coast of Niigata Prefecture in July 2007.

In addition to these “structural” cost factors, Tepco Managing Director Hiroaki Takatsu pointed to a pattern of consumption peculiar to large-lot users tending toward thin profit margins.

Takatsu said lower-priced nightly use accounts for more than 80 percent of their consumption, resulting in much lower unit prices charged to the 10 largest users.

METI has been publicizing the names of power companies that reported losses from competitive market sales, hoping such action will discourage them from giving too many perks to big corporate users at the expense of the regulated household sector. In fiscal 2008, five firms were named, while one was listed in fiscal 2010.

But such disclosures alone did not shed enough light on the power companies’ profit structures, which appear geared toward favoring large-lot clients.

A METI advisory council has reached an agreement that the entire power sales market should be liberalized to allow new entrants, including in the segment for homes. But it appears several years will go by before full-scale competition is introduced.

“If liberalized, competition will probably be promoted only in urban areas where suppliers can expect to make money,” said one analyst.

The government is also considering a plan to separate power distribution from power generation, which would encourage more entrants with power generation capabilities to step in and sell power.

But power companies appear to be mounting opposition to such a move so they can maintain their regional monopolies.

Tepco, undergoing restructuring with state backing, has proposed an average hike of 10.28 percent in home rates, irking both consumers and local officials.

Saitama Gov. Kiyoshi Ueda said Tepco’s restructuring plan doesn’t take into account such factors as substantial cuts in personnel like major commercial banks have conducted in the past when they relied on taxpayer money for restructuring.