Wednesday, June 12, 2013

Disguised Bailouts – Evidence that Electricity Deregulation (and Re-regulation) is Going to Happen

As recently as March, there were growing concerns about whether the LDP government, heavily influenced by the business community in general and the electric utilities specifically, would follow through on plans to introduce retail electricity competition and, eventually, a degree of separation among electricity generation, transmission and distribution functions needed for an environment that will support the existence of competitive supply and distribution companies.  In other words, would the current system of dominant regional electric utilities fight off attempts at reform, as they did in the late 1990s when similar reforms went forward in Europe, North America, Australia and many other places?

Several announcements last week lead me to conclude that, this time, the system will end up being reformed.  These announcements represent massive potential transfers to the utilities, to help them solve the problems they will face if systemic reform goes ahead.  Thus, in Japan, reform of a powerful industry involves placing the costs of past mistakes upon the ratepayers and the taxpayers, rather than driving the utilities into insolvency, creating distress among their lenders (all major Japanese financial institutions), etc., etc.

First, and perhaps most important, METI has floated plans to revise the utility rate base accounting in order to allow utilities to avoid massive write-downs and instead recover, spread over a number of years (approximately 10 years) in their electricity charges, the cost of decommissioning reactors prior to conclusion of their 40-year planned operating life.  This sets the stage for the utilities to end the “kabuki” play of spending money trying to reopen reactors that, in fact, are very unlikely to meet the new regulatory standards.  Of course, in Japan, these things take time--too much time.  And this is a massive disguised bailout by the ratepayers, and one that does not require any direct pound of flesh, such as a change of utility management.  

That said, it is a necessary and welcome step.  And as between the ratepayers and the taxpayers, it is better that the ratepayers bear the burden, since high and increasing charges by incumbent utilities will actually make it easier for new entrants, for investment in conservation and renewables, etc.

Second, the Nikkei reported that METI is proposing legislation to make it easier to provide governmental aid to a retail electricity provider that faces financial difficulties, adding some “catch all” circumstances to what had been narrowly permitted aid.  This is reported as an effort to help assure continued retail service to customers in the event that retail distribution companies suffer financial difficulties after introduction of competition.  Again, a disguised bailout, on stand-by, which seems intended to assure the incumbent utilities and retail customers.

Third, Chubu Electric and TEPCO have announced plans for a large new thermal plant in the TEPCO service area.  Chubu Electric plans to use its share of the generated power to serve customers in Kanto – TEPCO’s service area.  This is the first sign of mutual competition at the wholesale level.  Of course, the regional utility structure in Japan is akin to the regional "baby bells" in the United States after AT&T was split up, so it is quite unlikely these companies will be the source of real competition in each other's service areas, except for limited large customers with whom they have existing relationships.

Fourth, the latest “Abenomics” announcements of government growth plans clearly mention the introduction of competition in the electricity area as part of Prime Minister Abe’s growth strategy.  This seems a stronger endorsement than anything I have seen in the past.

Lastly, I went to a seminar last month on the future of Japan’s electricity industry.  One of the speakers is an ex-utility executive who now leads a research center at Tokyo University on smart grid implementation in Japan.  He was very clear that while he had once thought the concept unrealistic, he now believes the smart grid is coming, along with distributed generation and separated generation, transmission and distribution functions.  There is no alternative.

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