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Electric Power Market Reform in Japan-Update and Some Points for Future. October 2001 Takanobu YASUNAGA Ministry of Economy, Trade and Industry Agency of Natural Resources and Energy Electricity and Gas Industry Department. Presentation Contents.

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Electric Power Market Reform in Japan-Update and Some Points for Future

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    1. Electric Power Market Reform in Japan-Update and Some Points for Future October 2001 Takanobu YASUNAGA Ministry of Economy, Trade and Industry Agency of Natural Resources and Energy Electricity and Gas Industry Department

    2. Presentation Contents • 1.Electric Power Market Reform in Japan to Date • 2.Key Points of the Current System (Partial Liberalization) • 3. Progress Review • Power Rates Reduction • New Entrants • Progress in Electric Power Bidding • 4.Verification of the results of the current reform • competition and new entrants • ensuring the access to the network • 5.Perspective of electric power market reform • revisit of the primary objectives of reform • reform approaches • lessons from the California Power Crisis

    3. 1. Electric Power Market Reform in Japan to Date • Part of structural reform of Japanese economy to correct the high-cost structure • Introduction of competitive forces into the electric utility system • Introduction of the 1995 bidding system for wholesale supply → Shift to full-scale bidding system for thermal power sources • Partial deregulation of retail supply began in March, 2000. • Review after 3 years

    4. January 21 1999 Report by Subcommittee for Basic Policy Directions・ Interim Report by Subcommittee on the Rate System~“Basic Report” ○Partial deregulation of retail supply ○Relaxation of the price regulations(introduction of a notification system for rate reduction, diversification of rate menus) ○Future review: Approximately 3 years after implementation of the system December 2,1999 Report by Subcommittee of Basic Policy Directions ・ Interim Report by Subcommittee on the Rate System~“Report on the System ○Rules for Wheeling Service ○Rules for Relaxation of the price regulation ○Guidance for Fair Electricity Transaction ○Guidelines for Information Disclosure ○Guidelines for Troubleshooting May 1997 The Action Plan for Changes and Regeneration of Economic Structure ○For electricity and gas industry, our aim is to obtain a cost level that is in no way inferior to global level by 2001 and review the overall state of electricity industry in Japan. July 1997 Setting up of the Subcommittee of Basic Policy Directions Electricity Utility Industry Council ○Mardate from the Minister “In order to obtain a global cost level by 2001 and provide a basis for mid to long-term reduction in electric power costs in Japan, how should we design future electricity industry?” May 1999 Bill for Electric Power Market Reform Passed・Proclaimed

    5. December 24・27 1999 Notification of Wheeling Contract was submitted by Electric Power Companies March 21, 2000 Enforcement of New System (※)August 2000    Competitive bidding for power procurement in the government office started with Ministry of Economy, Trade and Industry implementing the first bidding. October 2000 Revision of Wheeling Contract drawn up by Electric Power Companies Review: Approximately 3 years after the implementation of the system

    6. After Partial Deregulation (new system) 【Starting March 21, 2000】  Before Partial Deregulation Electric Power Company Electric Power Company New Entrants (Companies outside the supply area included) Power Plant Power Plant Power Plant Electric Power Company reports the wheeling rates to the Ministry of Economy, Trade and Industry. Introduction of Notification System when Lowering Rates Deregulation of Option Menu Electric Power Company’s Power Line Power Lines “Guideline for Fair Power Trade” compiled jointly by the Ministry of Economy, Trade and Industry and the Fair Trade Commission Free Rates (competitive) Rate Control Rate Control Office Bldg ・Shopping Arcade, etc. Small to Medium Factories, etc. Household Office Bldg・Shopping Arcade, etc. Small to Medium Factories, etc. Household Department Store, Large Hospital, Large Office Building, etc. Department Store, Large Hospital, Large Office Building, etc. Large Factories, etc. Large Factories, etc. Large Consumers   (about 30% of the total)

    7. 2. Key Points on Current Partial Liberalisation • Common methods as used in electric power reform in other countries: Introduction of competitive forces in the power generation and retail sectors through securing open access to the networks • Electric power utilities keep owning and managing the networks and provide wheeling services. • Regulatory organisation shall post-monitor the implementation of wheeling rates and contracts. • Establishment of competitive conditions by implementing the Guidelines on Fair Electricity Transactions

    8. 3. Progress Review(1) Power Rates Reduction(October 2000) • Non-Deregulated Sector  → Reduction by an average of 5.42% by 10 companies • Wheeling Service Rates  →Reduction by an average of 7.3% by 10 companies • Expansion of Optional Contracts  →Expansion from 158 to 234 provisions

    9. Efforts by Electric Utilities to Reduce Supply Costs • Each company is making an effort to improve their own financial conditions • Reduction of depreciation cost by streamlining investments in plant and equipment • Reducing repair costs by efficiently operating equipment • Reduction of interest-payment costs by repaying interest-bearing liabilities • Pursuant to Efficiency Improvement Plan that utilities have announced (3 to 5 year rolling plan), they continue to improve capital ratio and reduce interest-bearing liabilities.

    10. 3. Progress Review (2) State of New Entrants to the Market • At present, there are 9 new entrants (companies filed notifications as “Electric Company of Specified Scale” based on the Electric Utility Law-as of July 2001). • Diamond Power Corporation, Marubeni Corp., Asahi Glass Co.,Ltd., eREX CO.,LTD., NIPPON STEEL CORPORATION, ENNET CORPORATION, SUMMIT ENERGY CORPORATION, Daio Paper Corp., Sanix Inc. (in the order of notification) • Of these, 6 companies have started supplying. • There are companies other than the 9 mentioned above that have expressed their intention of entry.

    11. 3.Progress Review(2)Share of the new entrants in liberalized market (Unit:100,000kw) ・This figure is based on the actual results from August 2000(A new entrant started to supply) to May 2001. ・Because four new entrants started to supply in April 2001, the share of the new entrants expanded from 0.08% to 0.2%.

    12. 3.Progress Review(2)New investment plan by new entrants • After the start of the partial liberalized system, new entrants came to bear new investment. • New investment is very important to maintain the competition momentum. • At the present, the prospects for new investment are limited. • ENNET Ibaraki(210,000kw、July 2001~) Chiba(100,000kw、April 2003~) Chiba(100,000kw、Fall 2003~) • SanixHokkaido(74,000kw、August 2002~)

    13. 3. Progress Review (3) Progress in Electric Power Bidding • Since August 2000, under then-the Ministry of International Trade and Industry, at least 8 central/local governments have invited bids for electric power procurement, mainly for their government buildings (old service areas of Tokyo, Chubu, Kansai and Kyushu). • There are some cases where private enterprises requested the bids. • For public bidding, there has been a reduction of up to 20% in the contracted price compared to past electric power expenses.

    14. Independent companies are preceding. Utility companies are also reinforcing their operations. 3. Progress Review (4) Development of Decentralized Electricity Source Supply Services

    15. 3. Progress Review (5) Government Measures-Securing Market Competition • Execution of market monitoring in the liberalized sector • Implementation of a survey on the price (every April and September) •   Publication of a collection of consultation and dispute cases, such as wheeling supply issues between electric power companies and new entrants. • Securing conditions for fair competition through cooperation with the Fair Trade Commission • Inspection against possible cross-subsidization in electric power companies through an audit of both regulated and liberalized activities • Ex-post review of the appropriateness of the wheeling revenue/ expenditure

    16. Government Measures (1): Price Monitoring for Large Consumers • Survey on the electric power prices and supply sources for large consumers that are subject to liberalisation (about 6600) • Findings from the first price survey for the period of April to September 2000 (quarterly data), were made public in January 2001 (flash report). • The survey for the period from October 2000 to March 2001 is under way and the result will be available around June.

    17. Trend of Electric Power Price

    18. Government Measures (2): Publication of a collection of consultation and dispute cases, etc. • Monitoring market players through hearings and consultation of new entrants and utility companies. • Information Dissemination of cases such as consultation and legal interpretations through the official Web site of the Ministry of Economy, Trade and Industry (hereinafter referred to as METI) . This informative data is accessible at any time. • Open access to the network- receive comments on the wheeling service contract, and its implementation

    19. Government Measures (3): Transparency of the Market • Transparency- For new entrants and investors, this is the basis for “trust” in the electric power market. • Publication of views based on the Anti-monopoly Law on issues such as:1)securing power sources by new comers; 2) opening the economic power interchange system by the Central Electricity Council to non-utility companies; 3)joint supply by utility and new entrant. • Contribute to the transparency of the market by disclosing responses from electric power companies concerning the capacity of wheeling supply.

    20. 4.Verification of the results of the current reform (1) Competition and new entry • Efforts to improve efficiency and lower prices as a result of increased pressure from competition • Improved services to customer • Rate of consumers changing their suppliers • Development and prospects of new entrants’ investment in electric sources • Development and prospects of competition among electric power companies

    21. 4.Verification of the results of the current reform(2) Securing access to the network • Transparency of the wheeling system-trust in the market • Efforts and performance of the electric power companies to open access • Objective evaluation including the market participants • Post-monitoring system - Effectiveness of regulatory system • Results of new economic power interchange system

    22. 5. Perspective of Electric PowerMarket Reform (1) Revisit of the Primary Objectives of Reform • Maintenance of industrial competitiveness and enhancement of consumer benefits through reduction in infrastructure cost • Creation of new growth sectors by increasing productivity • Realisation of an electric power investment system that corresponds to a new demand structure and technological development • Achievement of industrial structure and enterprise governance that is able to meet the changing business environment and market expectations flexibly

    23. 5. Perspective of Electric PowerMarket Reform (2)Reform Approaches • The basic principle in Japanese reform of promoting competition through securing open access to the network remains unchanged. • What is requested is not simple “liberalisation” or “deregulation”, but the concept of “institutional reform” or “regulatory reform” that pro-actively designs a system to make market mechanism function properly. • Report of Electricity Industry Council : Based on the objective review of :performance of partial liberalisation; state of overseas deregulation and; possible impact on the public interest, it should be assessed whether or not to take policy options such as 1)expansion of the scope of partial liberalisation, 2)full-scale liberalisation, and 3) a power pool market.

    24. Lessons from the California Power Crisis (1) • External Factors • High growth in demand, strict environmental regulation, the natural gas price hike, and water shortage • Systemic Problems • Structural deficiency to provide adequate power supply • Electric power companies found themselves difficult to have risk hedge measures • Fragile system that is unable to cope with tight demand-supply • Background for confusion • Reform born out of political compromise between special interest groups • Dual power structure of state and federal governments

    25. Lessons from the California Power Crisis (2) 《 Points for Future System Reform 》 1. System that enables a smooth new investment 2. Danger of careless and inflexible price regulation 3.Limitations on risk management may endanger stable supply 4.Impact of environmental regulations on investment 5.Decentralized power generation as alternatives 6. Structure to secure stable system operation of electric power in harmony with electricity market 7. Scheme to encourage flexible demand reaction to price changes in electricity 8. Issues of market power in the electricity 9. Governance of power system operation

    26. Lessons from the California Power Crisis (3)“Current Overseas Electricity Reforms and Challenges for System Reform”(from the METI Report April 19, 2001) • Electric power system is subject to various external changes regardless of the presence of deregulation. It is necessary for people involved to pay constant attention to these changes and respond to them flexibly when necessary. • Failure in electric power market reform gives rise to serious crises like the one in California. We should take the greatest care when designing future systems. • It is quite useful for us to assimilate and absorb experiences from reforms in other countries and regions including California.

    27. Electric power market reform and corporate strategy • It is inevitable for corporate performance to be called into question aimed calls for transparency and accountability in the capital market. • Network and Competitive Sectors - Business models are getting diversified. • Expertise of the people working in the electric power business - Their market value should remain unchanged under any system. • System reform is a catalyst - Through internalizing the system reform, it is highly feasible to raise corporate competitiveness in the electricity industry- Win-Win strategy is possible.