Second-round Bill on the Power System Reform

(HARA Eiji, PPPC President)

n the ordinary Diet session, a bill entailing full opening of entry into power sales has been submitted as the second round bill after the first power system reform bill enacted in the extraordinary session last year.

If the proposal bill is to be enacted, all the power sales industry including toward households, in addition to the large-consumers that has already been liberalized, will be opened in a full scale. Given the circumstance, while various sectors such as telecommunication pay much attention, there remain challenges to be tackled.

Here is a summary of the opinion that the author stated in the Lower House’s Economy and Industry Committee as a reference on May 7.

1.         Power Reform and Third Arrow of Abenomics (growth strategy)

Views of domestic and international critics toward Abenomics are, unfortunately, not always sympathetic. Especially, there are quite a few concerns such as “what’s going on with the third arrow (growth strategy)?” or “it’s not going to be launched, is it?”

Under such circumstance, it is the strong commitment of Prime Minister Abe, especially the policy line and decisiveness shown in his speech at Davos Convention in January, that has kept the world expectations.

In the speech, Prime Minister Abe stated the following six policies.

(1)    Reform of bedrock regulations

(2)    Promotion of TPP and EPA

(3)    Investment to growth industry through GPIF reform

(4)    Corporate tax reform

(5)    Promotion of women, labor market reform

(6)    Reform of corporate governance

In growth strategy, it is important to make an easy environment for private business and to get rid of redundant restrictions, so the regulatory reform stands as a main challenge. From that perspective, it seemed reasonable that Abe stated the reform of bedrock regulations as the first pillar. In that first pillar, Prime Minister Abe spoke of the power system reform as the first theme.

--Excerpts of Prime Minister Abe’s Speech at World Economic Forum 2014

May I tell you, ladies and gentlemen, that late last year, we decided to go on major reforms.

I have broken through the notion that certain reforms could never be carried out.

We will completely liberalize Japan's electricity market. By the time the Olympians compete in Tokyo in 2020, Japan's electricity market will also be completely competitive, for both power generation and retail, with power generation split off from power transmission.

In Japan, people have long said that such a thing is just impossible.

(abridged)

I have maintained that I am willing to act like a drill bit; strong enough to break through the solid rock of vested interests.

Soon, our deregulation package will be set in motion. Designated areas, on my own watch, will cut through red tape.

There, over the next two years, no vested interests will remain immune from my drill.

The world perceived the speech with great expectations that Abe loudly announced to break through the vested interests within the coming two years at least in the National Strategic Special Zones.

Yet, the first precondition for Abe’s bow is the ongoing power system reform. If, possibly, Abe’s vow that “Japan’s power industry will have become a completely competitive market in 2020” falls short of reality, it will largely lose the world’s expectations toward not only the power industry in Japan but Abenomics entirely.

2.         Upcoming challenges of the bill

Reasons and needs for power system reform can simply be explained as the following.

l  Because of the industrial nature having economy of scale, the power industries were either publicly-managed or monopolized with regulations in any countries of the world at old times.

l  But the economy of scale was lost except in the power distribution sector due to technological innovations, and conventional regulations lost their rationalities.

l  Nonetheless, the regulations which already lost rationalities have been maintained in Japan, and now Japan has a few-steps-later start toward power system reforms than in many other countries.

Such a feature can typically be observed in many other industrial sectors dubbed solid rock vested interests. The policy of opening entry into power sales is certainly a step toward reform on such structures and there is no doubt on that direction.

Still, there are three points to be taken into consideration.

(1)      Will the liberalization really create competition?

First, it is important to create competitions in reality by the liberalization.

As many critics have pointed out, although the liberalization of power sales targeted at large consumers (such as factories) was legislatively accomplished in the past, its effect on the actual entries was unfortunately rather limited. Even a government panel on power system reform pointed that “there is no actual change in the industrial structure that is de facto monopoly.” The reform must not end in such consequences.

It is necessary that business operators will actually emerge and create active competitions. Specifically, by getting rid of the conventional vertically-consistent power supply structural restrictions, there arise possibilities of cross-industrial entries and industrial realignment over such sectors as “electricity” or “gas.”

Furthermore, there are possibilities of creation of new services and infrastructure companies by merging with telecommunication or water companies, crossing the border of “energy” industry. For example, while Veoria in France is known as a water company, it actually operates energy and wastes-disposal services and serves as a comprehensive infrastructure company.

As such, there are possibilities that variety of new services and companies will be given birth through cross-industrial operations of sharable facilities and technologies, etc.

This time’s power liberalization should serve as a kick-off toward evolution and realignment of the whole infrastructure industries, and must do so to ensure effectiveness.

In the meantime, in advancing cross-sectorial realignments, there arise other policy challenges than the power reform. For example, reforms on gas supply system and other heat distribution supply system must be tackled simultaneously. Also, discussions on the opening of entry into publicly-managed infrastructure services such as water have been intensively going on since this February in the subcommittee of the Industrial Competitiveness Council. Private entry into the field has been enabled through so-called “concession” method has been enabled due to legislation of the new PFI Act in 2011, but there still remain operational difficulties.

While the issues tend to be regarded as different matters because the power has historically been operated “privately” and the water has coincidentally been operated “publicly,” both have in common the challenge of “introduction of competition into infrastructure sectors.”

By comprehensively tackling with such challenge of “introduction of competition into infrastructure sectors,” we may hope promotion of bilateral cross-sectorial entries and competition, creation of new comprehensive infrastructure business, and exports and global expansion of the new infrastructure system in the future.

However, pushing forward reforms relating with multiple industrial sectors altogether may accompany difficulties. In that case, there is an alternative to utilize such a framework as the National Strategic Special Zones as regional experiments.

(2)      Transition to regulatory body possessing high independency and expertise

Second, in order to create competition in reality, it is important to set functions of a regulatory body to monitor whether the competition is undertaken properly or a healthy competition is impeded.

On this point, the supplementary provision of the revised bill enacted in the last autumn stated to “shift to a new administrative organ having high degree of independency and expertise in eye of 2015.” Discussion and preparation to that goal must be started immediately.

In that process, from the perspective of “independency,” nothing is more important than excluding influences of the existing power companies that have monopolized the industry. To that aim, it is inevitable to change the relationship of the politicians and the Ministry of Economy, Trade and Industry with the power companies that have often been criticized as cozy.

A reasonable solution would be application of the so-called 3^rd clause administrative commission.

Also, from the perspective of “expertise,” it is important to design a system to secure and promote able persons by referring to past experiences like monetary regulations.

Further, if the reform is to stimulate advancement of “introduction of competition into infrastructure sectors” in general, a new regulatory body will likely supervise not only the power but other industries widely. Discussions should be taken in eye of such possibilities.

(3)      To prevent the liberalization process from suspending or moving adversely

Finally, the process toward liberalization must not be suspended or moved backward.

First, the shelved challenges of separation of power generation and distribution and abolishment of fee regulation should be advanced with effective and elaborated measures.

Also, there will always be the possibility of arising movements to suspend or move adverse the liberalization process with unjustifiable reasons like “the electricity bill has been increased temporarily,” “there were blackouts” or “there were changes in the situation regarding the nuclear power plants.” Such oppositions must be prevented.

For reference, let us give a few words about the past experiences in other fields.

First is the air liberalization.

In the air industry, at old times, there were measures to avoid competition such as that business operators lived separately in domestic and international flights and “one route, one company” rule. Deregulation has been gradually undertaken since 1980s and fee regulation was abolished.

Articles written at an early stage of deregulation process said “after the deregulation the fees rather increased.” But looking back from the present, the deregulation created fruits such as various fee menus and emergence of LCC. It is not to say that everything is perfectly going on and there are always challenges to be tackled, but at least at the present time, nobody should be thinking that the past measures to avoid competition should have been maintained.

Second example is the taxi regulation.

In this industry, deregulation has been advanced from 1990s to early 2000s, and later, there emerged discussions that “excessive deregulation” worsened working environment of drivers and caused accidents. It is now again in the direction of demand-supply adjustment and strict fee regulation.

While we’ll refrain from discussing this issue in detail, the issues of working environment and cause of accidents should be handled in the context of labor management and safety regulation, and it is illogical to restore the old demand-supply adjustment and fee regulation. Currently ongoing discussions are moving toward reregulation based on a false understanding of “excessive deregulation” at the stage when the effects of deregulation are yet to be seen fully (i.e., fees are yet to be decreased and the state of excessive supplies have not been changed).

A lesson from the two cases is that consequences of liberalization process do not always appear immediately, and there always emerge movements to suspend or move the process adversely for whatever reasons. This is what we must be careful about.

One preventive measure is to separate the process from the government ministries having jurisdiction over the industry, and to create an authority to monitor and advise the reform process. There were examples of third-party organization under minister-in-charge aside from the ministries like Council on Promotion Privatization of Japan Road Authority or Council on Privatization of Japan Postal Services.

Listening to this kind of discussions, officials of the METI may think that “we’re different from the ministries opposing to reforms; we’re the promoters of liberalization.” And it is true that they are making efforts. But as long as there are possibilities that some adverse movements to unsettle the liberalization process will arise, it is important keep in mind the past wisdom to separate the team into two sides within the government that has been used to push forward the past, highly difficult reform processes.

In any case, it is highly expected that the power liberalization will advance firmly and steadily as top batter of the third arrow.