Monitor power industry reform

The recent revision to the law on electricity business marks only the first step in a three-stage reform of Japan’s power utility industry that will take years to complete. Continued vigilance is needed to make sure that the reform will not be watered down in the subsequent process and will achieve greater competition by facilitating entry of new suppliers to the market, thereby offering consumers more choice in services at lower costs.

The revised law enacted by the Diet on Oct. 13 set in motion a long process of freeing up the nation’s electricity sector from the regionally monopolized supply system, which dates back to 1951. An independent body will be created by around 2015 to coordinate power supply by observing demand nationwide. When a power shortage is feared in one region, the entity will have the authority to order utilities in other regions to share electricity with it, by boosting their own power generation if necessary.

The subsequent process of reform is set in the supplementary provisions of the law. According to the timeline, the government will submit separate legislation to the Diet in 2014 to fully liberalize the retail electricity market by around 2016, allowing new entrants to sell electricity to households — business that has been monopolized by the existing 10 major regional power companies.

Another bill to be submitted to the Diet in 2015 will separate these utilities’ power generation and distribution business by around 2020, thereby making the transmission and distribution networks — currently controlled by the regional utilities — accessible to new entrants on equal conditions.

This third stage of reform is expected to usher in full-scale competition in the power industry — and therefore it is feared that there will be lingering resistance not only among the existing utilities but also in some political circles. Makoto Yagi, chairman of the Federation of Electric Power Companies, said stable supply of electricity has been maintained as the major utilities controlled both power generation and transmission, and called for a “flexible review” of the reform if problems emerge in working out more details of the process.

The government has explained that the lengthy, multi-staged reform process has been set so that the changes will not disrupt the stable supply of power. Close monitoring is necessary to ensure the subsequent process of reform does not deviate from its objective.

The nation’s electricity business has been gradually liberalized since the 1990s, but power supply to households, which accounts for about 40 percent of the electricity market, has remained the monopoly of the 10 big regional utilities. In the business of selling electricity to large-lot users, new entrants accounted for a mere 3.5 percent of the total supply in fiscal 2012, due to the high costs to access the transmission and distribution networks of the major utilities.

It was the disaster at Tokyo Electric Power Co.’s Fukushima No. 1 nuclear power plant in March 2011 and subsequent power shortages that prompted the government to seek the overhaul of the regional monopoly in the power supply system.

The launch of the new independent body to coordinate power supply should help fill regional gaps in supply capacity in cases of natural disasters, and rolling blackouts like the one introduced after the nuclear disaster will be less likely if power supply across regional blocs is facilitated by the entry of new suppliers. The success of the reform will depend on whether it will bring more competition to the power industry, thus benefiting users.