The Management Power of Electric Companies

ABSTRACT

As stage two of the ongoing liberalization of the electric power industry, plans have been made to deregulate, by FY2004, the retail sectors that caters to the 500kW+ high voltage customers and, by FY2005, those that cater to the remainder of the 50kW+ high voltage customers. This comes after the liberalization, in 2000, of the suppliers to the special high voltage customers, a move that freed up 26% of the electricity market. Thus, by FY2004, 40%, and by FY2005, about 60% of customers will receive the benefits of a liberalized market, and will be able to institutionally select the supplier of their power. While there are 9 thousand special high voltage accounts, there are another 740 thousand (standard) high voltage accounts, making the total number of liberalized accounts in 2005 about 750 thousand. This will certainly have a large impact upon the nature of the electric industry going forward. Furthermore, in 2005, the electricity trading market, a long pending issue in the Diet, is scheduled to open.

It is clear, however, that the liberalization of the industry does not necessarily mean an across-the-board drop in prices. Analysis has shown that, in many cases, the contracting of commercial-scale utility customers, which is supposedly liberalized, has not been completely free. This has had to do with the failure of the price mechanism amongst the special high voltage customers, which is apparent when looking at the demand curves for industry and operations. More efforts are needed in designing a full-scale customer oriented market.

Much consideration has been given to the question of how to create an industrial infrastructure that accommodates Japan's current reality while still holding onto the principle of small government. Though the electric companies lowered their prices in 2002, they lowered them by different amounts and at different times. From this, it is clear that lock-step actions will be difficult to sustain. Depending on the region, the increase in electricity demand also differs greatly. While growth is solid in Tokyo and Central Japan, other regions like Kansai expect only negligible growth. Differences are large even when looking at the account books. Next to the "Gulliver-sized" Tokyo Electric, which sustains an overwhelmingly large cash flow and boasts the largest equipment investments and cost cutting initiatives, the other companies are weak when standing alone.

These differences directly influence a company's capacity to cut prices. With its relatively healthy demand, Chubu Electric (Central Japan) is in the safe zone. Its capacity is relatively large and will remain so given that nothing unexpected occurs such as the loss of a main customer. But Tokyo Electric can afford to be more competitive. It cut its prices by 7% in 2002, and its finances are such that it could make another cut in 2005. With Kansai Electric, by comparison, because demand growth in that area is expected to be the lowest in the nation, after their 2002 price cuts they will have to wait until 2008 to make another 5% discount.

The establishment of a trading market can be expected to intensify competition in the electric industry. What will result is a more powerful industry that is in line with those of other countries. When constructing an innovative system like the ones that are being adopted abroad, it will be important that corrections to the system can be made flexibly and efficiently.

Despite the shortcomings of the price mechanism, the minimum imperative for liberalization is to enable electricity suppliers to better respond to the diverse needs of the consumers. The extent to which it fulfills these needs will thus be an important factor in evaluating the performance of the system. We will know that the liberalized system for electricity provision is working properly when competition can always arise and when there is elbow room for reductions in electricity prices.

Because of the healthy companies that boldly and unflaggingly step up to the challenge of liberalization, the electricity industry will grow much stronger and, it is hoped, will serve as a model for industrial liberalization throughout the globe.