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A recharged power industry

Three months after December’s general election returned the Liberal Democratic Party to power under Prime Minister Shinzo Abe, the electric power industry appears set to regain its old political clout, much of which was curtailed during the three-year rule of the Democratic Party of Japan.

On Feb. 8, an expert panel of the Ministry of Economy, Trade and Industry, tasked with reforming the power industry, adopted an official report that, among other things, called for (1) separating the generation and distribution of electricity, both of which are now in the hands of the country’s 10 major power companies, and (2) liberalizing the retail sale of electricity.

The committee report strongly reflects the wishes of the power companies. The power generation and distribution will be separated five to seven years from now and the target date for liberalizing electricity sales is three years from now.

Thus the report has completely dashed public hopes for drastic reform of the current monopolistic power supply system, which dates back to the immediate postwar years, and for a complete dismantling of the existing power industry structure.

The METI committee was created by the DPJ regime to overhaul the power industry in the aftermath of the March 2011 Fukushima nuclear power plant disaster. Although the LDP scored a landslide win in December’s Lower House election, it was not going to scrap the reform efforts altogether for fear of possibly disadvantaging itself in the Upper House election this summer.

But according to a power company executive, the power industry received an LDP promise that the composition of the expert panel members would change in the industry’s favor and that the separation of the power generation and distribution and the sales liberalization would be put off. Thus it has become easy for the power industry to gut the reform plan.

The separation of power generation and distribution could take one of two forms. Under the “legal separation” formula, not only the operation and management of transmission facilities and lines but also their ownership would be shifted to a new separate company. Under the “functional” separation scheme, only the operation and management of transmission facilities and lines would be relegated to a separate organization (power companies would continue to own the transmission facilities and lines.) Needless to say, the power industry wants the functional separation.

Although the METI committee report did state that the final goal was “legal” separation, it includes a proviso that if a major problem occurred, functional separation would be considered.

Makoto Yagi, president of Kansai Electric Power Co. and chairman of the Federation of Electric Power Companies, said Feb. 15 that legal separation would impair the ability of the power companies to raise funds — which the power industry could describe as a “major problem.”

Since debentures issued by power industry members account for 20 percent of the entire corporate bond market, banking institutions would not keep quiet. The argument that reform of the power industry carried out in the wrong way would harm the Japanese economy could pressure the LDP. The party, which is pushing a policy of “Abenomics” to resuscitate the economy, wants to avoid negative economic factors.

An industry insider said that since the Abe Cabinet includes Akira Amari, the economic revitalization minister who is well-versed in the energy sector and the economy, it won’t repeat the DPJ regime’s mistake of antagonizing financial markets by revamping Tokyo Electric Power Co. in response to the Fukushima nuclear disaster.

The power industry is no longer worried about the consequences of liberalizing retail sales of electricity, as the liberalization won’t materialize for at least three years. After that, the deregulation would be welcome for a number of reasons, including the fact that power companies currently must get the government’s approval to raise power rates. This requirement will become unnecessary after liberalization.

Moreover, liberalization will free power companies from the obligation to supply electricity to all areas of the country, including remote and sparsely populated areas. This duty increases costs for power companies. More important, the industry is said to have proposed a deal with the government, which doesn’t want to see power rates rise after liberalization. If the government permits the restart of nuclear power plants that have been kept offline, power companies can lower power rates, since the unit price for nuclear power generation is relatively cheap.

This may sound as if the industry is blackmailing the government and the LDP, but it appears that the LDP has acceded to the industry’s argument. Indeed, Abe stated shortly after his party won the December election that he would seek to confirm the safety of the currently suspended nuclear power plants so that those certified as meeting the safety standards can restart within three years. Although he later retracted this statement, it is obvious that both the LDP and the industry are taking it for granted that the supply of electric power will be “normalized” with the resumption of nuclear power operation in three years.

The secretariat of the Nuclear Regulation Authority is making moves that appear to defer to the wishes of the LDP, possibly making it easier for the government to make a “political decision” to permit resumption of nuclear power plant operation, overriding the NRA’s judgment.

Sources close to the power industry predict that the industry will be able to claim a full recovery of its former political clout in July. That month, the LDP government is expected to stabilize further with a victory in the Upper House election (which will enable the LDP to control both chambers of the Diet together with its coalition partner Komeito).

Another factor is that the NRA will come up with new safety standards for nuclear power plants that month. These standards are expected to remove obstacles to restarting a nuclear power plant.

Since the electric power industry is an important customer of financial institutions, the latter will benefit from the power industry’s success in delaying the separation of the power generation and distribution and in being allowed to restart nuclear power plants in exchange for its acceptance of the market liberalization.

Many influential posts in both the Abe Cabinet and the LDP are held by those who have played important roles in building cozy relations with the power industry. By working closely with them, the industry will in all likelihood be able to direct “electric power reform” as it wishes.

Two years after the Fukushima nuclear catastrophe, the power industry no longer feels bound to act timidly as it did under DPJ rule. It is about to fully resurrect itself with the same clout as before — to do as it pleases without restraint.

This is an abridged translation of an article from the March issue of Sentaku, a monthly magazine covering Japanese political, social and economic scenes.