The fraud called electricity retail liberalization

Sentaku Magazine

Three months have passed since the retail sale of electric power was fully liberalized. Approximately 300 companies have since entered the business of generating and selling electricity, and more than 1 million consumers have signed contracts with them, switching from the major power companies that have monopolized each region.

Some of those consumers may be feeling satisfied with new lower power rates, but their satisfaction could be short-lived. They may well end up shouldering the huge cost of the liberalization program.

There are hidden costs related to generating and supplying electricity that consumers never catch sight of because they are not listed on their monthly bills. These hidden costs are so huge that they could erase any benefits to consumers.

The Organization for Cross-Regional Coordination of Transmission Operations (OCCTO) issues weekly reports on how the liberalization of electricity retail is proceeding. It says that as of June 10, about 1.11 million consumers had concluded contracts with new power suppliers. Though this number may seem impressive, it accounts for a mere 2 percent of the total number of the nation’s households. If this percentage figure is taken as a yardstick, the liberalization of power retail can be termed a total failure.

How much savings have accrued to those 1 million plus consumers as a result of changing their power suppliers? It is still too early to come up with an exact answer because electricity bills usually go up sharply in the winter and summer months. But assuming the new contracts have resulted in an annual average saving of ¥10,000, as indicated by many websites’ comparison of differences in power charges, the total savings come to about ¥11.1 billion.

But this figure is only an illusion, because huge investments were made in preparation for liberalization and the money needed for those investments is being collected from all of the power consumers in the name of fees for using transmission lines.

One case that illustrates such big investments is the installation of what is known as a “smart meter,” a device that measures the amount of electricity consumed in real time and communicates the data to a power company for monitoring and billing. This device had been on the market even before liberalization but is now a must-have. A smart meter must be installed in every household in principle when its electricity supplier is changed. Tokyo Electric Power Co., which serves 20 million households, initially budgeted ¥21.9 billion for three years from 2012 to 2014 to install smart meters. Although a regulatory body reduced the sum by ¥6.5 billion, the balance still means that Tepco spent around ¥5 billion annually in the name of liberalizing the retail of electricity.

Other major power companies also invested huge sums to install smart meters. The total sum budgeted by the nine other regional power companies for that purpose averaged ¥62 billion a year. Even if it is assumed that 10 percent of that was slashed by the regulatory body, it still leaves a total of some ¥55 billion a year. When the amount spent by Tepco is added, as much as ¥60 billion has been spent every year for installing smart meters.

This sum more than offsets the cost effectiveness of liberalization. The estimated savings of ¥11.1 billion accruing to consumers is an overblown figure if various marketing devices to lure consumers are taken into account. This figure is likely to dwindle from next year on, showing that it is difficult for consumers to benefit.

Worse still, smart meters have become an impediment to, rather than a necessary tool for, the liberalization of electricity retail. The meters were originally meant to accumulate data, which then would be transmitted to power retailers via the major regional power monopolies. Only through this process will it become possible to calculate charges for individual customers.

After the liberalization got underway, however, it surfaced that it is impossible to collect the necessary data. The regional monopolies blame the manufacturers of the smart meters for supplying faulty products. But the monopolies, which bought the smart meters, aren’t free of blame. They will have to bear the cost of parts replacement and repairs, which in turn will be passed on to consumers in the form of increased expenses for transmitting electricity.

Since their installation will continue beyond 2020, there will be no limits to rising costs related to smart meters. Any savings accruing to consumers by switching suppliers will easily be wiped out by this increased cost.

The smart meter is not the only thing causing a huge waste of money in connection with the liberalization. For example, in preparation for the liberalization program, OCCTO purchased an exchange system built by Hitachi Ltd. for use in the power wholesale exchange. The cost was low at about ¥1.6 billion, but when transactions started, the system proved to be unworkable, necessitating major repairs.

OCCTO also functions as a new provider of jobs for ex-bureaucrats of the Ministry of Economy, Industry and Trade (METI) who are seeking post-retirement jobs. An ex-METI official already secured the post of OCCTO secretary-general — a position from which the official can intervene in OCCTO’s personnel affairs.

The body is staffed by about 150 people, including those seconded from the major power companies. It is difficult to say that the body is functioning properly because former METI officials are in powerful positions. An insider says OCCTO is made up of an undisciplined group of people with no coordination among them and that experts originally from the power companies, who are the only professionals in the body, have proven useless.

OCCTO’s annual budget stands at a whopping ¥4.5 billion, including the salaries of its personnel. The budget is expected to surge because the body plans to spend an additional ¥3.5 billion to develop a new exchange system. All these sums, of course, are to be shouldered by consumers.

The government has spent huge sums of taxpayer money in connection with the liberalization of electricity retail. While the sum spent on publicity has remained less than ¥100 million, the government has earmarked ¥2.2 billion in the current fiscal year for subsidies to renovate hydroelectric plants and ¥12 billion for technological development of next-generation thermal power plants. These types of funds are used almost exclusively by major power companies, as if they are being rewarded for cooperating with the liberalization.

When all the figures cited above are added together, the total comes to around ¥80 billion and is bound to keep on rising every year. And this money is charged to consumers while they are unaware of it. Compared with the large amounts of money thus collected from consumers, an annual saving of ¥10,000 resulting from changing one’s power supplier is just a mirage.

This is an abridged translation of an article from the July issue of Sentaku, a monthly magazine covering political, social and economic scenes. English articles of the magazine can be read at www.sentaku-en.com .