Subcommittee Recommends Further Liberalization of Electricity Industry - International Law Office

Subcommittee's Recommendations
Potential Implementation Measures
Comment

The third meeting of the Fundamental Issues Subcommittee to the Electricity Industry Committee of the Ministry of Economy, Trade & Industry's Advisory Committee for Natural Resources and Energy was held on December 2 2002. The subcommittee agreed upon a final proposal for the next stage of liberalization of the electricity industry in Japan.

Subcommittee's Recommendations

The subcommittee's recommendations were released in the form of a report submitted at the December 27 2002 meeting of the Electricity Industry Committee. In essence, the report recommends that during the next three years liberalization of the retail electricity industry in Japan should be expanded from sales to extra high-voltage consumers (ie, large-scale consumers using more than 2,000 kilowatts (kW), which account for about 26% of overall consumption in Japan) to encompass sales to high-voltage consumers (ie, consumers using over 50 kW, which account for a further 37% of overall domestic consumption).

There are two proposals as to how these changes will be introduced. The first is a two-stage process under which retail electricity sales to consumers of more than 500 kW but less than 2,000 kW will be liberalized by around April 2004, and retail sales to consumers of more than 50 kW but less than 500 kW will be liberalized by around April 2005. The alternative is a single-stage process under which all retail sales of electricity to consumers using over 50 kW but less than 2,000 kW will be liberalized by around April 2005.

In 2001 26% of electricity sales were attributed to extra high-voltage consumers and 37% to high-voltage consumers. This means that once the changes have been implemented, roughly 63% of Japan's retail electricity market will be open to competition. Comprehensive liberalization (ie, retail supply to households) is scheduled to be implemented two years later, for April 2007.

Potential Implementation Measures

In order to successfully implement the reform measures, the ministry is also considering:

• establishing a wholesale electricity trading exchange (incorporating one-day spot and futures trading);
  
  
• establishing an independent market regulator during the next two years to ensure compliance with market rules on, among others, access to transmission lines, operation of grids, security of supply and information disclosure;
  
  
• establishing separate accounting procedures or 'Chinese walls' for transmission operations in order to promote greater transparency of wheeling charges (this is somewhat of a compromise, as it does not require the incumbent regional electricity utilities to separate their generation and transmission assets, which new entrants argue is necessary to ensure fair competition); and
  
  
• revising same-time, same-amount fluctuation charges and back-up supply fees, and abolishing transfer fees.

With regard to timing of the implementation of changes to the legal framework, the Electricity Industry Committee is scheduled to publish an intermediate report for public comment, following submission of the report by the Fundamental Issues Subcommittee. The intermediate report will then be used as the basis for preparing a final bill setting out the changes to the Electricity Utilities Industry Law (Law 170/1964, as amended), likely to be submitted to the Japanese Diet (parliament) sometime during 2003.

Comment

The proposal marks the third major phase of reforms to the electricity industry by the government. The first phase of reforms was implemented in 1995, involving the introduction of a wholesale tender system. The second phase of reforms was implemented in March 2000 with liberalization of retail electricity sales to large-scale consumers. While the reforms implemented to date have seen some reductions in electricity prices and participation by new market entrants, it is arguable whether the reform measures have successfully removed the market barriers that act to prevent fair competition - the main purpose behind the reforms.

For further information on this topic please contact Paul Davis or Anne Hung at Baker & McKenzie GJBJ by telephone (+81 3 5157 2723) or by fax (+81 3 3470 3152) or by email (paul.davis@bakernet.com or anne.hung@bakernet.com).