* Japan panel urges "unbundling" to ease utilities' grip on grid
* Experts call for retail electricity sector deregulation
* Regional monopolies' system sustainability questioned
By Risa Maeda and Linda Sieg
TOKYO, July 13 (Reuters) - Japan should overhaul its power sector, dominated by regional monopolies, to promote competition and a stable power supply, according to a draft proposal issued on Friday by a panel of experts set up after the Fukushima nuclear disaster.
The report advocated sweeping reforms, including "unbundling" the regional utilities' grip on the transmission Of electricity as well as generation, and opening up the retail power business supplying households and other small-lot users.
Utilities and the politicians and civil servants allied with them have long argued Japan's system of regional monopolies that own both power plants and transmission grids ensured vital stability in the electricity supply.
But that argument was undercut by rolling blackouts after a the March 11, 2011 earthquake and tsunami that devastated Tokyo Electric Power Co's Fukushima Daiichi atomic plant. And broader public confidence in utilities that had touted nuclear power as safe has since been shredded.
"The 3/11 disaster called into question the sustainability of the long-existing electricity supply system," the draft proposal said, noting the Fukushima crisis also prompted a broad review of the role of nuclear power in Japan's energy portfolio.
A separate panel has proposed three options for Japan's medium-term energy mix, with nuclear power's share ranging from zero to 20-25 percent by 2030, and the government is aiming to pick from one of those scenarios by the end of August.
The draft proposal called for the "unbundling" of regional untilities' grip on power generation, transmission and distribution as essential to promoting competition and boosting the role of renewable energy, such as solar and wind power.
Such sources now supply only about 1 percent of Japan's electricity if large hydro-electric plants are excluded.
Japan's 10 regional power monopolies now own transmission and distribution grids in their service areas and new entrants must pay access charges to use them.
"UNBUNDLING" FOR COMPETITION
Advocates of separating the functions say the added competition could help bring down electricity rates, which manufacturers complain put them at a global disadvantage.
The draft proposed two options for proceeding with "unbundling". One option would be to set up publicly run Independent System Operators (ISO) to coordinate, control and monitor the operation of transmission grids along lines similar to state-based organisations in the United States.
Another option is "legal" unbundling, in which utilities would be required to form holding companies and, under that, establish subsidiaries for generation and transmission.
"Unbundling would generate market competition so many newcomers would enter the market and compete and we can expect the tariff should be lower. Of course, there are many other factors," panel member Hiroshi Takahasi, a research fellow at Fujitsu Research Institute, told Reuters recently.
The proposal also calls for opening up the retail electricity business supplying power to households, offices and small businesses to competitors to the regional utilities.
And it urges deregulation of how retail prices are set to encourage competition among the regional utilities.
Japan began deregulating its electricity market in the 1990s, but did not open up the retail sector, which provides the bulk of the politically powerful utilities' profits.
The draft, the gist of which is expected to be approved by the panel soon, does not specify when needed legal changes would be implemented. Panel members have said the revisions could be submitted to parliament next year to take effect in 2014. (Editing by Aaron Sheldrick and Ron Popeski)