Fifteen months after the partial liberalization of the electricity retail market, new players in the industry remain scarce.

Evidence is emerging, however, that greater change is afoot.

A decontrol measure implemented in March 2000 opened up about one-third of the country’s electricity retail market, enabling nonutilities to sell electricity to large-lot users.

Five companies have since entered the market, which is worth 15 trillion yen, with four more having notified the government of their intention to do so, according to the Ministry of Economy, Trade and Industry.

“New entrants started their operations and their competitive bidding to supply government buildings with electricity brought down the cost of electricity,” a senior ministry official said. “We are surely starting to see the effects of the deregulation.”

In one such example, eRex Co., affiliated with major trading house Mitsui & Co., won the fiscal 2001 contract to supply electricity to buildings owned by the Kagoshima Prefectural Government. The deal will save the local government more than 20 percent on its electricity bill from the previous year.

Yet the presence of new players remains negligible.

“Not a bit of impact has been felt by utilities companies for now,” said Masayasu Ishiguro, senior consultant at Nomura Research Institute.

In April, the five newcomers sold 37 million kw of electricity, accounting for a mere 0.05 percent of overall demand, according to the trade ministry.

Tokyo Electric Power Co., which supplies the Kanto region and is the nation’s top power company, said it lost roughly 5 billion yen in sales to new firms that entered the market during fiscal 2000.

This figure constitutes just a fraction, however, of the 5.23 trillion yen in sales it generated during the same period, according to Hiroshi Araki, manager of Tepco’s corporate planning group.

And the dominance of the utilities will likely continue for some time.

“It is not competition to snatch away customers but competition to secure surplus power,” said Kenji Kobayashi, a spokesman for trading house Mitsubishi Corp., which entered the electricity retail business through its wholly owned subsidiary Diamond Power Co.

Indeed, none of the five new retailers has its own power generating facilities and grids, and all are effectively serving as resellers.

They procure surplus electricity from third-party power producers — typically manufacturers that generate energy for their own use at plants — and resell it to large-lot end-users, borrowing utilities-owned grids for transmission fees.

The amount of surplus power available to new entrants, however, has fallen well below initial expectations, limiting the scope of competition, according to industry officials and analysts.

Things may change soon, however, now that more powerful players are entering the market.

Ennet Corp.’s first power plant, now under construction in Omiya, Ibaraki Prefecture, starts operation in mid-July.

Ennet Corp., jointly set up by NTT Power and Building Facilities Inc., Tokyo Gas Co. and Osaka Gas Co., is currently building a power plant with a maximum output of 21,000 kw in Ibaraki Prefecture. The plant will start operations in mid-July.

Tokyo Gas will build a 100,000-kw power plant in Chiba Prefecture in order to start supplying Ennet with power in 2003.

Takeji Yoshida, general manager of the energy solution business department of Tokyo Gas, said that, with their existing large-scale power plants, the advantage of the utilities in terms of economies of scale is clear.

He added, however, that Ennet can overcome its disadvantage by using highly efficient power plants.

Big utilities have efficient power plants, but they are also stuck with old inefficient ones that bring down overall efficiency, thus creating room for new players to compete, he explained.

The U.S.-based Enron group is planning a similar course of action.

The group is studying the possibility of building a power plant with a capacity of 2 million kw in Rokkasho, Aomori Prefecture, to start operations in 2007.

Within the Japanese electricity market, the nation’s 10 utilities have long enjoyed a regional monopoly.

Deregulation began in 1995, when the government opened up the electricity wholesale business.

This deregulatory measure, implemented via the first revision of the Electricity Utility Law in 31 years, allowed independent power producers to sell electricity to the utilities.

Then, in March 2000, the scope of buyers of IPP-generated electricity was expanded to large-lot end users.

By introducing competition, the government hopes to reduce electricity prices in Japan, which were around 75 percent higher than those in Germany as of February 2000 — to help reinforce Japan’s industrial competitiveness.

However, Japan still lags way behind other developed nations in liberalizing its electricity market.

And as the trade ministry official acknowledges, the prevailing view is that true competition will not happen unless powerful utilities begin to compete with each other, crossing the borders of their respective service areas.

Utilities believe that competition of this kind could occur any time, however, saying that it is just a matter of pulling the pin.

Last year’s deregulatory measure has enabled utilities to supply energy to large-lot end users outside their designated service areas.

On top of the challenge posed by the new market players, electric power companies are coming under public pressure to improve their management efficiency.

Tepco, for instance, has pledged to achieve a 20 percent cut over the next five years in both its costs and its interest-bearing debts, which now stand at 10 trillion yen.

Toshinori Ito, senior analyst at UBS Warburg (Japan), said that the utilities are finally being tested with regard to their management efficiency.

As the deregulation process moves forward, gaps in efficiency will emerge among the major power firms — a quite normal scenario in other sectors but not among the utilities.

Later this year, a government energy panel is expected to explore the possibility of taking further deregulatory measures.

The shocking energy crisis in California, which arose from a variety of factors, including the drastic deregulation of the state’s power industry, has naturally been subject to close scrutiny and is expected to affect these upcoming discussions.

In March 1998, California opened up its electricity retail market to newcomers, while detaching power grid operations from the utilities.

The state also installed a grace period during which major utilities were restricted from raising their retail prices.

This program coincided with the information technology boom, which boosted electricity demand in the area.

The construction of new power plants was limited at the time, however, as prolonged discussion ahead of the regulatory changes generated uncertainty over state energy policy.

This combination of factors, along with soaring crude oil prices, precipitated an acute electricity shortage.

For major utilities, it meant higher procurement costs from other power generators.

Unable to reflect this increase on retail prices, they suffered management crises.

Consumers and businesses in the state have meanwhile been faced with soaring electricity rates and a series of rolling blackouts.

This situation will likely continue — if not deteriorate — into summer, when power consumption is at its peak.

One important lesson from the debacle in California is the importance of securing an environment in which private-sector firms feel comfortable investing in power facilities, according to the trade ministry official.

Japanese power companies meanwhile blame the crisis on the removal of grid operations from the utilities’ control.

This, they say, has created a situation in which no one is held responsible for the whole chain of power services from power generation to transmission and supply to the end-users.

Ishiguro of Nomura Research Institute said, however, that separating the power transmission functions from power producers is now a global trend.

As long as power companies continue to control the grids, there cannot be fair competition between them and the new players that need to use the grids, he said.

Ishiguro said the Fair Trade Commission is too weak a watchdog to ensure this kind of fair competition, while the trade ministry’s current role is improper.

“It’s like playing the role of policeman and judge,” he said of the ministry.

“Japan needs an agency that oversees competition in the power market.”

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