* Japan power costs among highest in world
* Electricity mkt overhaul is key part of PM's reform agenda
* But regional monopolies will be hard to overcome
By Aaron Sheldrick and Risa Maeda
TOKYO, May 16 Japan is embarking on its most
ambitious attempt at electricity industry reform since 1951,
with Prime Minister Shinzo Abe well-positioned for victory in a
battle to break up powerful regional monopolies that is seen as
a test of his political agenda.
The time is ripe for the government's push to reduce some of
the highest electricity costs in the world by opening up the
market for competition, with energy companies' public image
battered in the wake of the Fukushima nuclear crisis.
Major reform is rare in Japan, but Abe's sweeping plan for
the power industry is central to his drive to overhaul the
country's economy, as high energy costs would derail efforts to
turn back decades of stagnant growth and deflation. The
government is pushing for recently submitted legislation to be
passed before parliament goes into recess on June 26.
Change won't be easy as the politically well-connected
utilities are part of an entrenched web of interests and have
resisted attempts since the 1990s to liberalise the industry.
The companies and their affiliates have ties with politicians,
fund their campaigns and often give government officials
"(Japan's power companies) are good for nobody but
themselves. So we gotta to get rid of that, energy costs are so
expensive," said Taro Kono, a lawmaker in the ruling Liberal
Democratic Party, who has long been critical of government
support for utilities and says the plans should go further.
The companies, including Tokyo Electric Power Co
and Kansai Electric Power Co, still supply almost 98
percent of Japan's electricity and terms for access to their
transmission lines make it onerous for new entrants.
Wrenching control of transmission from regional monopolies
to create a national grid is also a key issue after the March
2011 earthquake that sparked the Fukushima disaster highlighted
the inability to transfer power to areas suffering shortages.
Toshimitsu Motegi, the Minister for Economy, Trade and
Industry, told parliament in March that overhauling the market
was at the core of attempts to reduce Japan's soaring energy
costs, which have pushed it into a record trade deficit.
"This is a major reform of historic proportions, which
fundamentally reviews the regional monopoly system that has
continued for six decades," he said.
The monopolies, set up in 1951 during the American
occupation after World War II, followed the U.S. model at the
time, with regional utilities controlling all aspects of power
generation and transmission with legally sanctioned
Tokyo Electric, which before the meltdowns at its Fukushima
Daiichi facility was the most powerful utility, is under
government control and is being split into separate units. The
company will likely be the template for broader change.
"Tepco today is not the same Tepco as the Tepco of the
past," said Gerhard Fasol, chief executive officer at
consultancy Eurotechnology Japan KK.
Fasol said he expects the industry reforms to be pushed
through unless there are significant political changes in the
country, one of the last major industrialized economies to
attempt to fully liberalise electricity markets.
Japan's ability to smoothly transfer power between regions
is also hampered by it having two different frequencies dividing
its eastern and western sides.
That is supposed to change in the first stage of the
reforms, slated to be carried out over the next seven years. The
government has submitted legislation to create a national grid
company in 2015, with the bill also laying out a schedule for
the following two phases of reform.
Hopes to pass the bill in the current session ending June 26
may be fading with some members of parliament holding up debate,
according to a government official involved in drafting the
"We expect Minister Motegi to make a strong statement (to
get parliament to start debating the legislation)," the official
In the second phase, the government plans to liberalize the
market for homes, an important source of earnings for power
The market to supply to customers using more than 50
kilowatts was opened up in 2005, but utilities can still block
supply from independent power producers as they control
The final and most ambitious phase envisages breaking the
monopolies into separate generation and transmission companies
by 2020 and abolishing all price controls.
While the ultimate aim is to reduce electricity prices for
Japanese business and voters, one of those who helped draft the
scheme questions whether the reforms will drive down costs.
"Consumers in Europe and in the U.S. often found there was a
rise in electricity bills after power sector deregulation," said
Hiroshi Takahashi, a research fellow at Fujitsu Research
Institute and a member of panel that advised on the reforms.
Subsidies for renewable energy, environmental taxes and
higher fuel import bills kept prices in some countries from
falling after deregulation, he said.
While the energy companies say they support the thrust of
the proposed changes, they have repeatedly urged the government
to prioritize stable power supply and to slow reforms if this
cannot be guaranteed.
And the utilities may have had some success in watering down
the legislation, Takahashi said.
"When compared with the METI panel's proposals in February,
the bill looks to be somewhat weakened in terms of the authority
of the (national grid company)," he said.
Still, trading houses and other companies are watching the
developments with interest, sensing this time around might be
"This a real opportunity I reckon, especially with Tepco in
the state it is in," said Koji Takayanagi, a senior managing
executive officer, at trading house Itochu Corp, when asked
about the reforms at a recent earnings briefing.
Japan's trading houses say they are keen to enter or expand
power generation businesses and they have plenty of funds, while
the biggest regional electricity monopolies recently posted
combined losses of $16 billion for a second year.
The shutdown of most of Japan's nuclear reactors for safety
checks in the wake of the Fukushima disaster, has also sparked a
search for alternative power sources such as renewable energy.
"The trading companies, and also other companies such as
real estate companies, gas companies ... and telecoms companies
such as Softbank have already entered the electricity market,"
said Fasol. "To some extent that is an avalanche, which will be
difficult to stop now."
(Additional reporting by Linda Sieg, James Topham and Osamu
Tsukimori; Editing by Joseph Radford and Simon Webb)