CIFECENTER FOR INTEGRATED FACILITY ENGINEERING International Comparisons of Electricity Restructuring: Considerations for Japan

The structure of Japan's electricity sector, as modified by legislation in 1995 and 1999, will be reviewed in 2003. At that time, it is likely that further decisions will be made regarding the restructuring of Japan's electricity sector. The objectives of this study are to provide insight into the alternative ways that the sector might be restructured and the experience of other countries that have already undertaken restructuring. It is hoped that learning from the experiences of others can help Japan find its own best way to provide low-cost, reliable and environmentally acceptable electricity to all its end-users. Japan is undertaking electricity sector reform to reduce electricity rates for end-users, which – as of 1999 – were the highest of all OECD countries. The means proposed for doing this is to make electricity markets more competitive. This effort began in 1995 with an amendment to the Electric Utility Industry Law that allowed independent power producers (IPPs) to build generating plants and sell electricity to Japan's ten integrated electric utilities. An amendment in 1999 permits an end-user with demand exceeding 2 mW at levels of 20 kV or higher to choose its own electricity supplier, including IPPs. Moreover, electric utilities can sell power to one another. Another amendment requires that all new thermal generating capacity be subject to competitive bidding and allows integrated utilities to submit bids outside their own service areas. Regulation of the electricity sector is the responsibility of the Ministry of Economy, Trade and Industry (METI). METI is responsible for developing, implementing and enforcing rules regarding transmission rates and transmission access for service provided by electric utilities to IPPs and other utilities and for rules regarding environmental and safety standards. It is also, together with the Japan Fair Trade Commission, responsible for competition policy and dispute settlement. To date, transmission and distribution remain regulated monopolies. In OECD countries, the principal motive for restructuring has been to increase economic efficiency and reduce electricity costs to end-users. For example, California and Pennsylvania in 1996 had the tenth and eleventh most expensive prices of the fifty states in the U.S. Economic theory suggests that the best way to increase efficiency and lower costs is through making markets competitive, and this has been an increasingly popular policy over the past ten years. There is, however, another path: to reform regulation so that the results of regulation closely mimic the results of competition. …