Energy Reform and the Nationalization of TEPCOPolitics Economy
The Fukushima Daiichi nuclear disaster has forced Japan to take a sharp look at its energy policy.
Energy reform is an area of great popular concern, and with fervent debate still underway, the future of the Japanese power industry remains unclear. What is plain to see, though, is that reform of the power industry is a central issue in the ongoing policy review process. The nuclear disaster and its aftermath has highlighted three problems in particular that are driving the reform movement.
Regional Monopolies, Vertical Integration, and the Total Cost Method
The first key problem is that Japan’s power industry is composed of regional monopolies. TEPCO’s supply shortages in the wake of the nuclear disaster led many to wonder why other power companies with excess capacity couldn’t step in to meet demand. The existence of these monopolies, however, left consumers with no alternative suppliers, and the demand for cleaner, cheaper energy was not met. Now that the technology for a diversified grid is evolving, including renewable sources like wind and solar power, I believe that industry will benefit from increased competition that includes these alternatives in addition to large-scale, concentrated power sources like thermal and nuclear plants.
The second problem is the vertical integration of the power industry—an issue inseparable from the problem of regional monopolies. As I just mentioned, the field of power generation is ripe with technological possibilities; but for these possibilities to be realized, power generated by alternative sources must be delivered to consumers through power lines. Unfortunately, entrenched power companies own this grid and have little incentive to use it to transmit power produced by their competitors. Even in cases where grid owners have opened power lines to competing producers, they have purchased that transmitted electricity at prices far too low for the rivals to stay in business.
This is not a problem of power generation, but of vertically integrated ownership in which electric companies own both the means of production and delivery. This status quo blocks improvements in energy efficiency and reductions in power generation costs. Given the nature of the power grid infrastructure, it should be operated on the basis of a “common-carrier model” in which the grid itself is publicly regulated and available for use by competing energy producers.
The third and final problem is the “total cost method” used to set electricity prices. Under this method, power companies set prices by adding a fixed margin to the cost of power generation. Reduced prices thus by definition mean reduced margins, so the companies have zero incentive to reduce costs for their customers. No other goods are priced in this way, and the power industry desperately needs a more market-driven pricing model.
The three problems outlined above are at the center of the current debate on energy reform, and proposed solutions have garnered strong popular and industry support. The task now is to figure out exactly how to move forward with reform. Japan cannot expect its power companies to take the initiative in pursuing reforms that would force them to forfeit their own vested interests. This has given rise to the argument that TEPCO should be publicly managed.
Politically Led Reform
TEPCO faces enormous compensation costs for its role in the Fukushima disaster. For a time the company’s future was in jeopardy, but the Japanese government made it possible for TEPCO to survive by creating the Nuclear Damage Liability Facilitation Corporation. TEPCO is still in dire straits, however, as it tries to cope not only with compensation claims but also the soaring cost of the fossil fuels now used to make up for the lost nuclear generating capacity. The company’s efforts to raise prices and maintain its executive autonomy have clashed with the political drive to reform the power industry described above.
The press has recently reported on a comprehensive business plan between the NDLFC and TEPCO, including details of compensation payments and management restructuring. The largest point of contention is that the plans calls for the government to have a two-thirds stake in TEPCO, with certain conditions attached. The NDLFC and Ministry of Economy, Trade, and Industry argued that nationalization is essential to reform. TEPCO and the Ministry of Finance, meanwhile, voiced concerns about the government holding this majority stake in the company, with the former worried about losing its executive control and the latter anxious about the increased costs that would result from nationalization.
Conditions are ripe for Japan’s politicians to lead a major reform of the power industry. This will involve working out the specifics of the reform, starting with how to restructure TEPCO.
(Originally written in Japanese on March 26, 2012.)
nuclear power energy policy wind power TEPCO Tokyo Electric Power Company power generation solar power power grid common carrier regional monopoly electricity price total cost method Nuclear Damage Liability Facilitation Corporation