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(Adds Tepco also looking to sell LNG beyond Tokyo area)
TOKYO, May 22 (Reuters) - Tokyo Electric Power Co said on Thursday it plans to sell electricity outside its traditional service area, the latest sign that a shake-up in Japan's power industry following the Fukushima nuclear disaster may be taking hold.
The plan by the utility known as Tepco is a direct response to incursions into its Tokyo area by Kansai Electric Power Co and Chubu Electric Power Co, which are dominant in Japan's biggest economic centres beyond Kanto, as the capital region is known.
Japan's government is pushing through reforms to boost competition and reduce the highest electricity rates in the industrialized world after the meltdowns at Tepco's Fukushima Daiichi nuclear plant - following a 2011 earthquake and tsunami - exposed flaws in the national grid and pushed up prices.
Japan's biggest utility was taken over by the government in 2012 and is paying billions of dollars in compensation to those affected by the disaster. Tepco has also been widely criticized for an inept response to the disaster and for cover-ups on nuclear safety before it, something that may hobble its attempt to increase market share.
"It's difficult to see Tepco overcoming its reputational issues even outside its traditional catchment areas," said Tom O'Sullivan, founder of independent energy consultancy Mathyos Japan.
Japan's regional monopolies, set up in 1951 during the American occupation after World War II, followed the U.S. model at the time, with utilities controlling all aspects of power generation and transmission with legally sanctioned profitability in designated areas.
The government plans a radical shake-up, opening up regional grids, each tightly controlled by the local monopoly, to all participants by 2015 and fully liberalizing prices for residential customers after that. A final reform stage involves splitting up the utilities into generation and transmission companies.
Tepco said it aims to start electricity sales nationally, but mainly in the services areas of Kansai Electric and Chubu Electric as early as Oct. 1 after completing the necessary registration for sales outside its own region on Thursday.
"It's not just Chubu and Kansai, but competition in the Kanto area has gotten very tough and we have lost costumers," said Hideo Sanada, a senior official in Tepco's business strategy division. "To answer that, we want to approach (customers) outside our supply area, outside Kanto."
Tepco has lost almost 10,000 large customers since the beginning of April last year, according to company data.
It is aiming for 34 billion yen ($335 million) in annual sales outside its traditional service area within three years, and 170 billion yen within 10 years. Tepco had electricity sales revenues of 5.9 trillion yen ($58.13 billion) in the business year that ended in March.
The utility plans to sell 10 billion kilowatt-hours of power a year outside the Kanto area within a decade, nearly 4 percent of its current power sales.
Tepco said it has already begun marketing to mass retailers and other companies with fees that undercut competitors' rates, officials said. The discount is a single-digit percent, Hideo Sanada, the head of Tepco's business strategy, told reporters, without being more specific.
The power Tepco sells outside Tokyo will be bought from companies with their own in-house generators, the country's wholesale power exchange and possibly from other regional power monopolies, officials said.
Tepco also said it is looking to sell natural gas beyond its service area for the first time, putting it in competition with traditional city gas providers. It will pitch contracts to customers packaging power and gas sales.
Tepco currently sells around 1.3 million tonnes worth of liquefied natural gas (LNG) annually via pipeline and LNG trucks. It plans to nearly double that by adding sales of 1 million tonnes within a decade.
$1 = 101.4950 Japanese Yen Reporting by James Topham, Osamu Tsukimori and Aaron Sheldrick; Editing by Ian Geoghegan