On March 21 2000 the second stage of reforms to the Electricity Utilities Industry Law (Law 170 of 1964 - the Electricity Law) came into force. The reforms have opened a path for new providers to sell electricity to a limited scope of 'large-scale consumers'. These account for about 27% of electricity consumption in Japan. The amendments are part of the government's policy, which aims to increase the cost-competitiveness of the industry as a whole in order to decrease Japan's medium to long-term electricity costs.
The first stage of partial liberalization of the electricity market began in December 1995, when the Ministry of International Trade & Industry or MITI (since January 6 2001 the Ministry of Economy, Trade and Industry (METI)) introduced a wholesale tender system. Opinion is still divided as to whether this step achieved its objectives.
Although reform of the electricity industry is a high priority for the government, there is as yet no comprehensive reform plan. Rather, the government's timetable calls for a review of the results of the first two stages of liberalization in March 2003, with a view to deciding what further steps should be taken.
The Electricity Law is the central law regulating the supply of electricity in Japan, and covers such issues as:
- permission for undertaking an electric utility supply business;
- standards for electric facilities;
- use of land;
- inspection by designated authorities; and
- punitive provisions.
The law is designed to protect consumers of electricity and promote sound development of the electricity supply business.
In the past, the electricity industry was exempt from the Anti-Monopoly Law. The law has been amended to remove this exemption, giving the Fair Trade Commission (FTC) jurisdiction over competition matters, such as fair treatment of new market entrants.
The Japanese electric power industry has traditionally consisted of 10 major electric companies which are licensed (or more accurately, granted permission to act) to undertake a general electric utility supply business (GEUSB) under the Electricity Law. A GEUSB is defined as a business activity intended to supply electricity "to meet the demand of the general public" (Article 2(1)). A person who has obtained permission to conduct a GEUSB is defined as a general electric utility supply business operator (GEUSBO) (Article 2(2)).
The GEUSBOs have traditionally had monopolies over the generation and supply of electricity in the geographical areas in which they are located.
In addition, the Electric Power Development Corporation was established in 1952 by nine of the electric utilities (excluding Okinawa Electric) in cooperation with the government. It was developed as a wholesale electric utility supply business with the purpose of generating electricity for wholesale to other utilities. The corporation is scheduled to be privatized in 2003.
First round of liberalization
In December 1995 a tender system for the wholesale supply of electricity was introduced in the hope of increasing the efficiency of the Japanese market. This was achieved by introducing a new class of electricity generators called wholesale electric utility supply businesses operators (WEUSBO). WEUSBOs are permitted to generate electricity to sell to GEUSBOs, but not to any member of the public.
The experience seems to have been somewhat mixed. In 1996 19 contracts were awarded to independent power producers, and 16 were awarded the following year. However, in 1998 one electric power utility (Shikoku Electric) called for a tender and only the Tokyo Electric Power Company (TEPCO) called for a tender in 1999. There were no tenders called in 2000. One WEUSBO which was awarded a power supply agreement under tender, General Oil Co, withdrew from the business, lending weight to arguments that liberalization could affect the security of supply.
Strong arguments were also mounted that liberalization, combined with the slowing growth of demand, would make it difficult to make the investments necessary to protect the environment and reduce global warming. An additional claim has been that bidders under the tender system have sought to reduce their prices by using low cost, high emission fuels such as coal and residual oil.
The enthusiasm for new investment has also been dampened by the growth of demand slowing. Total demand until 2008 is predicted to increase at 1.8% per year, the first time this growth rate has fallen below 2% since World War 2. In March 2000 TEPCO formally requested its independent power producers to postpone imminent deliveries for a year due to poor consumer demand.
Second round of liberalization
The second stage of liberalization took effect from March 21 2000, when the ban on the retailing of electricity generated by corporations other than GEUSBOs was partially lifted. This was done in order to partially open the Japanese retail electricity market to both foreign and domestic competition.
The second stage of liberalization involved the creation of another new class of operator: the special-scale electricity utility supply business operator (SSEUSBO). SSEUSBOs are restricted to selling electricity to "major factories and other large-lot users". The latter are defined as users who receive "high voltage" electricity (no less than 20,000 volts), and consume no less than 2,000 kilowatts (kW) per year. This definition will be reviewed after a three-year trial period.
GEUSBOs are required to make transmission lines available to SSEUSBOs or other GEUSBOs on a non-discriminatory basis, in order for them to supply large consumers in their service area not contracted to the GEUSBO. They are also able to supply electricity to qualifying customers outside their own territories.
Under the revisions to the Electricity Law and guidelines jointly released by MITI and the FTC in December 1999, the 10 major Japanese utilities had to submit (i) a connection supply agreement, which sets out wheeling fees (Article 24-4), and (ii) a final guarantee agreement, which specifies rates and other supply conditions when the utility supplies electricity to guarantee the supply from an SSEUSB (Article 19-2). These had to be submitted by January 4 2000.
The purpose of this disclosure requirement was to allow MITI to judge the fairness of these fees, and if necessary to issue change orders pursuant to the Electricity Law. All the utilities complied, and on January 31 2001 METI confirmed that both the wheeling fees and the conditions of the final guarantee agreements were acceptable and no change orders need be issued. The submitted materials were publicly released by MITI.
The policy behind the public disclosure of fees was both to minimize administrative interference and to promote self-regulation. The information subject to disclosure includes:
- administrative rules (eg, MITI-promulgated rules in relation to wheeling fees such as the Connection Supply Tariff Calculation Regulations);
- information with which to check the suitability of fees (eg, financial sheets in accordance with the accounting regulations distributed by MITI and the Connection Supply Agreements submitted by GEUSBOs to MITI); and
- voluntary explanations by operators (eg, operators may offer explanations on the setting of two-stage rates or treatment of excess profits).
One potential stumbling block to the entry of new players has been the level of wheeling fees that the Japanese electricity utilities charge for the use of their existing transmission and distribution grids. Under Article 24-4 GEUSBOs are allowed to determine wheeling fees provided the fees are notified to METI for approval.
Where power is supplied by GEUSBO to a 'large-scale consumer' in a zone, the charge payable by its own transmission section (assuming the generating section of the GEUSBO requests wheeling services from its own transmission section) and the wheeling fee actually paid by the suppliers other than the power company in the zone (including new operators in the zone, GEUSBOs from outside the zone and new operators outside the zone) should be basically the same.
Where the fees are not acceptable, METI may issue a change order.
The basis of calculating the wheeling fees is set out in MITI Ordinance 106, the Connection Supply Tariff Calculation Regulations.
The wheeling fees are calculated from four basic components:
- the portion of generation costs relating to wheeling-related costs (ancillary services);
- the portion of step-down costs relating to wheeling-related costs;
- all wheeling costs; and
- the portion of sales expenses relating to wheeling-related costs.
The effect of liberalization can already be seen. In response to industry pressure GEUSBOs have reduced retail wheeling rates by an average of 7.3%.
It is expected that public pressure will continue to drive the level of wheeling fees down. While the GEUSBOs have publicly disclosed their fees, there is still little financial information about wheeling fees. This makes it difficult for new entrants to assess their reasonableness, and whether they meet the guidelines.
Standards that came into effect on December 22 1999 set out circumstances where wheeling fees will not be acceptable. Generally there must not be an unfair difference between the fees under the connection supply agreement and the actual costs of the GEUSBO if it were to use the same network. These standards include the following principles:
- The factors included in the calculation of the forward-looking costs must be appropriate;
- The wheeling fees must be calculated in relation to the amount of use and calculated using the provisions of the Connection Supply Agreement in question; and
- Except where there is a proper case for discrimination, there must be equality between the users of the supply.
New entrants must also pay for a back-up service, which charges for (i) the supply of electricity to counter changes in the loading when 'same-time-same-amount' supply cannot be achieved, and (ii) the supply of electricity in times of an accident. The charges for (i) are calculated on a kilowatt hour (kWh) basis in accordance with the Connection Supply Tariff Calculation Regulations, while the charges for (ii) are based on self-generated supply fees of the utility.
Even if the back-up services are not utilized, the SSEUSBO must pay 30% of the basic charge.
A SSEUSBO may also contract with the GEUSBO for the maintenance and repair of facilities.
A SSEUSBO must supply electricity at a 'same-time-same-volume' rate (ie, the volume of electricity supplied should be the same as the volume of demand in 30 minute units and not over 3% more). The SSEUSBO must also follow the power supply instruction manuals drafted by the GEUSBO for the maintenance of stable supply and safety of workers. The documents issued by the GEUSBO include technical requirements for system links in relation to both customer facilities and power generator facilities.
The revised Electricity Law provides for a "final guarantee" to be given by the GEUSBO to any large consumers that have chosen to purchase electricity from an entity other than their original GEUSBO. This is so that there is no chance of any person not having access to the supply of electricity as a result of liberalization. The fees and conditions of the supply of electricity in such circumstances are set out in the final guarantee agreement, which must be also notified by the GEUSBO to METI pursuant to Article 19-2.
Article 21 of the Anti-Monopoly Law previously provided that the law did not apply to acts relating to the production, sale or supply of electricity by a person engaged in the electricity business. Article 21 has now been deleted.
The FTC/MITI Joint Committee guidelines (released in December 1999) set out the actions of the present utilities for maintaining fairness in relation to wheeling fees, and maintaining neutrality in running the electricity grid. In many ways, the guidelines are not dissimilar to those adopted in the United States, including the promotion of self regulation and the requirement that electric utilities must not charge new entrants at a higher rate. Specifically, the guidelines recommend that the GEUSBOs voluntarily implement various measures to promote fair competition, including:
- treating supply orders equally;
- responding to inquiries from potential new entrants or potential customers;
- establishing information centres for new entrants in the company's transmission division separate from the company's business division; and
- controlling internal information disclosure (by physical barriers, segregation of work, lack of personnel exchange and codification of inquiries).
Although the guidelines suggest certain triggers for METI intervention, it appears that METI will seek voluntary compliance before acting.
Behind these guidelines is a recognition that even with the liberalization and implementation of measures to promote fair competition, the playing field is still tipped in favour of the Japanese electricity utilities that control the power lines and have established market shares.
The guidelines also recommend that GEUSBOs set liberalized electricity supply rates that are "compatible" with the non-liberalized rates, and that the non-liberalized rates "reflect the creativity of liberalized rates developed under the new system" (with the underlying goal being to develop diversified rates structures consistent with the relative costs in both liberalized and non-liberalized sectors). Where METI accepts a consumer's claim that the rates are significantly incompatible and unfair, it may order the GEUSBO to submit its supply agreement or issue a change order in accordance with Article 23 of the Electricity Law.
There are three types of complaint procedure available to an aggrieved entrant:
- Under Article 111 a person may lodge a complaint with the minister of economy, trade and industry against an electric utility company in relation to such matters as fee standards, price calculations and the connection supply agreement. Complaints are generally determined within one month. If METI believes that the complaint is a competition issue, the complaint must be passed on to the FTC.
- Under Article 110 a person may make a complaint against METI if he/she is dissatisfied with a determination made in relation to a complaint against a utility, or any other decision by METI (eg, in relation to rates). The complaint is made to METI itself, which must hold a public hearing and make its decision within one month of the hearing. This decision may be appealed through the normal administrative appeal procedures.
- A complaint relating to a competition issue may be made directly to the FTC. Complaints which would be determined by the FTC would include those relating to impeding entry by new entrants by setting unfairly high prices, or interfering with business by supplying improper information. No timeframes have been set for such FTC determinations and the FTC does not have specialist staff able to deal with complex technical matters.
The Tokyo High Court has the power to review FTC decisions about questions of law but not of fact. Tokyo High Court decisions can be appealed to the Supreme Court.
Increasing focus will be placed on the role of the FTC which, along with METI, is responsible for ensuring that the liberalization measures are implemented fairly so as to encourage competition. It remains to be seen how strictly the Guidelines on the Fair Trade of Electric Power, released by the FTC, will be enforced.
At the time of the MITI tender in August 2000, both Tokyo Gas and Itochu withdrew from the tender process because their bids required back-up power to be provided by TEPCO at what the former believed were unacceptably high prices. The FTC investigated but ultimately decided to take no further action (although the circumstances in relation to the Tokyo Gas case were somewhat peculiar in that the proportion of back-up supply needed from TEPCO was greater than the amount Tokyo Gas could have supplied itself).
On January 10 2001 the FTC released its "Research Report Concerning Government Regulations and Competition Policy" with regard to deregulation and competition policy in public utilities. The report outlined that to make competition function effectively in the public utility works field it is integral that the following measures be adopted in full:
- the introduction of a plan to secure new entrants, beginning with the opening of the network (eg, transmission lines) which is owned by existing utilities;
- the securing of fair conditions of competition between the new entrants and the existing utilities; and
- the strict and fair enforcement of the Anti-Monopoly Law for acts which restrict competition.
One key to the success of the new measures will be the prevention of cross-subsidization by the electricity utilities between liberalized and non-liberalized user sectors. Another key area is the access to wheeling supply, as the utilities still firmly control transmission and distribution areas, and set wheeling charges.
Since the second stage of electricity liberalization was implemented on March 21 2000, seven enterprises have registered as SSEUSBOs. Other major companies are reportedly considering entering the liberalized retail electricity market.
One barrier facing new entrants is the difficulty of securing supply from generation facilities. So far all the new entrants have had access to excess electricity generated at, in most cases, self-generation facilities in their own industrial plants. E Power, a joint venture between Enron Corp (the largest natural gas and independent power provider in the United States) and the leasing company Orix Corp, is conducting feasibility studies towards the construction of its own generation facilities in several locations in northern and western Japan. EneServe, a domestic company, is also constructing a diesel generation plant in preparation for entry as a power supplier to large-scale consumers.
The GEUSBOs are attempting to minimize the impact of the reforms by restructuring and lowering charges, reducing the attractiveness of the cheaper rates offered by SSEUSBOs. In October and November 2000 the GEUSBOs reduced rates by an average of 5%.
In August 2000 Diamond Power won the tender for the supply of 4,500 kW of electricity annually to METI's main building, at the price of Y19.7 per kWh. This was a 4% reduction from the price METI had been paying to TEPCO, its traditional supplier. Bids were received from Diamond Power, TEPCO, and Tohoku Power.
The rate reductions by the GEUSBOs caused many large-scale consumers to reconsider whether calling for tenders under the new system would be worthwhile since the tender for supply to METI resulted in a price reduction of merely 4%.
With the emergence of more SSEUSBOs, large-scale consumers are increasingly offering tenders for the supply of electricity.
However, some tenders have already failed to produce the desired results, such as the tender for supply to the Saga Medical University (3,250 kW), where only Kyushu Electric responded.
Other companies are finding new ways of capitalizing on the new round of liberalization. JPX, formed by Itochu Corporation and Automated Power Exchange, was established to trade electricity over the Internet and offer consulting services.
Enron is attempting to win customers by offering a new type of contract. This offers a rebate of up to 10% of first-year electricity charges in exchange for the option to then supply power to the customer at the contract price.
Kansai Electric is developing a business solution for customers that consume between 500 and 2,000 kW of electricity. These customers do not qualify for large-scale supply because they fall below the extra-high voltage of over 2,000 kW specified in the Electricity Law. The Kansai business plan is aimed at prompting the government to broaden the scope of liberalization to cover high-voltage customers.
New business opportunities are appearing for financiers and security houses in relation to managing the risk involved for independent power producers, traders and self-generators through the use of derivatives and other financial products.
A full review of the results of the liberalization of the market is scheduled for March 2003, three years after the second-stage reforms were first implemented. In an outline of the government's new structural economic reform action plan put before the cabinet late last year, the government stated that it would consider further restructuring of the electricity market, including factors such as the state of competition, the security of quality and cost, and overseas liberalization trends. METI has also established an independent research group to measure the effect of the reforms.
In November last year a working group was established between the US and Japanese governments on the deregulation of the energy sector. US trade officials are applying pressure for further deregulation, including the creation of an independently run wheeling network, and a functional separation of transmission and distribution.
On January 26 2001 the Japanese government released an interim report which dealt with a number of submissions lodged in response to the government's draft three-year plan for the promotion of systematic deregulation. After receiving public comment, a final report will be completed by the end of March.
US representatives requested the establishment of a regulatory body independent from the policy division. METI outlined its view that with the recent reorganization of the government departments and agencies, the policy planning and policy enforcement divisions were clearly separated. METI also stated in the report that it will consider the separation of generation and distribution, and the establishment of a trading market and a spot market, when the three-year revision takes place. It further states that the next review will take place at an appropriate time based on market developments.
The Central Power Research Centre plans to begin a comprehensive quantitative analysis of the liberalization system and intends to propose a suitable system for Japan in early 2002.
Further liberalization of the power industry continues to be a key part of the government's policy.
The interim report of the Electricity Utility Industry Council, an advisory council to METI, was published in 1998. It opposed full-scale liberalization of retail power sales by non-electric power companies, calling such moves "too early and inadequate" in light of concerns over stable supply.
Meanwhile, the Liberal Democratic Party's Administrative Reform Commission set up a special panel to review the structure of the power sector. The commission is expected to suggest reforms to separate the functions into generation, transmission and distribution. The current GEUSBOs take the position that this would destabilize power supply.
The next significant date in the reform process will be March 2003, when the basic policy division of METI will evaluate the partial-liberalization measures adopted so far. This review is likely to focus on:
- the progress of partial liberalization (the position of new entrants, the efficiency of the electric utilities, the fees and services in non-regulated areas, and the position of the wholesale tender system);
- the state of liberalization in the electric power industries of other countries;
- the state of technology relating to supply lines; and
- the positive and negative public effects.
Recent developments in the power industry will provide more opportunities for investment and participation. However, further deregulation measures will be necessary to ensure that real competition is allowed to gain a foothold in the traditionally closed Japanese power sector.
The liberalization of the Japanese gas industry has been overshadowed by the implementation of similar reforms in the electricity industry. In both industries the object of the two stages of reforms has been to promote competition and so bring down prices. Japanese gas prices are roughly double those of other industrialized countries, although the established gas utilities claim that this is due to unique supply conditions, including relatively low consumption by individual users (affecting overall supply efficiency), high land prices and high maintenance costs.
As with electricity, the gas industry has largely been dominated by several large, vertically integrated companies, each enjoying a natural monopoly over production and distribution in its respective jurisdiction. The three big private companies, Tokyo Gas, Osaka Gas and Toho Gas, control roughly three-quarters of the total supply in the Kanto, Chubu and Kinki regions. In October 2000 there were a total of 237 companies supplying city gas to customers in Japan (comprising 169 privately owned companies and 69 public companies) .
Unlike electricity, however, the gas infrastructure is not widespread across the country, with gas supplied to only approximately 20% of urban areas and 5% of Japanese territory overall. The likely cause for this is the concentration of residential (around 39%), industrial (36%) and commercial (16%) consumers using liquid natural gas (LNG) receiving terminals, of which there are 22 in Japan, with another four under construction.
The majority of Japan's gas is imported as LNG from Indonesia (37%), Malaysia, and Australia. Japan is the largest importer of LNG in the world. Natural gas accounts for around 85% of all gas sales in Japan, with liquefied petroleum gas (LPG) making up the remaining 15%.
Over one-fifth of electric generation facilities in Japan are gas fired, with this figure forecast to increase due to Japan's energy procurement policy of attempting to secure a balance of generation sources, as well as gas's relatively low emission levels. Almost 70% of all natural gas in Japan is used as fuel in generation facilities.
The Gas Utilities Industry Law (Law 51 of 1954 - the Gas Law) is the main law regulating the supply of gas in Japan. It covers such issues as:
- permission for undertaking gas supply business;
- accounting standards;
- maintenance of gas equipment;
- safety and testing;
- inspections; and
The law is designed to protect consumers by coordinating the conduct of the gas enterprises, to promote the sound development of the gas industry, and at the same time protect public safety through regulating gas products and sales, and the operation of gas enterprises.
With the aim of increasing competition and reducing prices METI first introduced reforms to the law in 1995.
The first stage of reforms involved two facets. Firstly the liberalization of "large-scale supply" (namely, supply to consumers of over 2 million cubic metres per year) and allowing new entrants to supply large-scale users from outside their supply area. The second facet would involve added flexibility concerning fees and supply conditions (in principle through open negotiation among the concerned parties, with prior approval by METI no longer necessary).
As of September 1998 the majority of large-scale supply was still being conducted by the established gas utilities in their own supply areas, with only eight new market entrants emerging since the large-scale supply category was first introduced in 1995.
The City Gas Structural Reform Committee was established in May 1997 as an unofficial study group, headed by the director-general of the METI Public Utilities Department. The committee's task was to consider how further reforms should be implemented. In September 1998 the committee's findings were released, highlighting a need for further discussion.
The Urban Heat Energy Subcommittee of the Advisory Committee for Energy to METI then met to discuss issues such as a more open market structure, promotion of end-user's interests, greater choice for gas suppliers and less government intervention. It released its findings in a report on October 21 1999, entitled "System Structure for the Implementation of Gas Utilities Industry Law Reforms".
On November 19 1999 second-stage revisions to the law came into effect, corresponding to similar revisions made to the Electricity Law. The second-stage reforms included the following measures:
- large-scale supply was expanded from 2 million to 1 million cubic metres per year or more;
- the established gas utilities became obliged to notify and make public the 'wheeling service agreements' (entered into with the new entrants in relation to charges and other supply conditions for use of the existing gas-pipe infrastructure);
- selection agreements were introduced in the retail sector (ie, charge menus diversified);
- a system of notification of fees/supply conditions in relation to wholesale supply was introduced; and
- regulations concerning fees/supply conditions were abolished for simple gas businesses (approval procedures of regional committees made more transparent).
However, the revisions to the Gas Law still seem rather limited in comparison to the Electricity Law, and there are strong doubts as to whether the amendments have actually increased efficiency or competition.
Relationship with electricity reforms
Reforms in the gas industry have been closely linked to and often precede those introduced in the electricity industry. Particular attention is being paid to the third-stage reforms, with amendments likely to be reflected in the following changes to the electricity law.
The second-stage reforms are scheduled to be reviewed in November 2002, three years after they first came into effect.
However, debate on further amendments has already begun, with the Agency of Natural Resources and Energy establishing a research group in January to consider further reforms. As well as considering future regulatory schemes for City Gas, LPG and simple gas, other issues to be considered include natural gas pipelines and rules concerning ports for receiving LNG.
Naturally, the underlying consideration will remain that of "security of stable supply and consumer protection". However, forward-looking issues such as the unbundling of vertical businesses, and the integration of general gas businesses, and simple gas businesses will be discussed. Internal METI materials published in journals such as Energy Forum tend to support this view, outlining a shake-up of basic METI policies.
In addition, a joint committee of the FTC and METI released a report entitled "Guidelines on Fair Trading of Gas" on March 23 2000 with the purpose of increasing competition in the gas market. This report attempts to balance the policy considerations of both the Gas Law and the Anti-Monopoly Law. It corresponds to the "Guidelines on Fair Trading of Electric Power" released jointly by the FTC and METI on December 20 1999. This set out some desirable and non-desirable actions for fair and valid competition (eg, not setting unfairly low prices, excess charges for use of existing gas facilities and neutral management of gas networks).
Problems relating to the Gas Law will be dealt with by METI, and problems relating to competition (ie, under the jurisdiction of the Anti-Monopoly Law) will be dealt with by the FTC. The policy was designed for situations likely to arise in the initial stages of the new gas system, and it may be changed later in relation to developments in the market.
Types of gas business
There are presently three types of activity for which permission is needed under the Gas Law:
- general gas businesses (GGB or City Gas);
- simple gas businesses (SGB); and
- large-scale gas businesses (LGB).
GGBs supply gas through pipes within a set supply area, in which they have a virtual monopoly. They are most common in urban areas where pipe networks are simple to operate and maintain. Due to the natural monopolies that arise within each supply zone, gas charges and other supply conditions must be set in a supply agreement, which is approved by METI and then made publicly available. There is currently a large price variation between areas.
SGBs are smaller than GGBs. They supply gas from one supply point to a housing complex containing more than 70 households. SGBs are most common in cities, and because of their small size do not have set supply areas. Further, they may operate within a GGB supply area. In 1999 there were 1,778 small-scale SGBs. In 1997 SGBs supplied around 1.9 million mostly residential users (in more than 7,700 complexes). As with GGBs, METI approval is necessary for setting gas charges.
One measure being discussed in the METI research group is the amalgamation of GGBs and SGBs, which may lead to the substantial abolition of the supply area concept.
LGBs were first introduced in 1995 due to an increase in demand for industrial use outside GGB supply areas. LGBs can either be (i) GGBs that supply gas to meet large-scale demand inside or outside of their supply area (METI approval is necessary in both cases), or (ii) entities other than GGBs that supply gas for large-scale supply (ie, greater than 1 million cubic metres per year) inside or outside the supply area of a GGB.
In the case of an LGB supplying gas inside a GGB's supply area, METI approvalis necessary (although METI is obliged to grant approval unless it deems thatthere is a likelihood of the interests of users in the supply area of the GGBbeing harmed).
Where supply is directed outside the supply area of a GGB, notification is sufficient (Articles 37-8 and 37-9 of the Gas Law).
Unlike the other classes of operator, large-scale customers may negotiate gas charges and other conditions of supply as a result of the 1995 reforms.
Wheeling supply may be carried out by GGBs for large-scale supply by another gas business. Under Article 22-2, these GGBs must lodge their wheeling service agreements, which contain gas charges and other supply conditions, with METI for approval. METI will approve the agreement if there is no discriminatory treatment against any person and persons being supplied are not placed in exceptionally difficult circumstances. After the wheeling service agreement has been approved by METI, the GGB must make copies of the agreement publicly available.
There is a further category of wholesale gas business (WGB) where an operator supplies gas to a GGB (other than wheeling supply). The WGB must notify METI of the rates and other supply conditions contained in the wholesale supply contract. The only exception to this is where the GGB is receiving the supply from the WGB for sale to a large-scale customer, and the supply conditions satisfy the requirements in the METI ordinance.
As with the corresponding electricity reforms, it seems that there is criticism from potential new entrants in relation to the wheeling agreements.
The wheeling agreements for Osaka Gas, Tokyo Gas and Toho Gas (the companies designated by METI under the Gas Law) were notified to METI on February 17 and 18, and March 8 2000, respectively. At the time of notification, potential entrants commented that the cost structure of the wheeling fees was unclear (ie, accounting of costs in relation to pipes and land), with some even suggesting that all the costs of the GGBs were being passed on through the wheeling fees. In November 2000 a report on improving the transparency of wheeling agreements was compiled, so that in the case of an inappropriate difference in wheeling fee calculations, the agreement may be subject to an order for change.
Another development has been the increased cross over between gas and electric industry players, made possible by revisions in the Electricity Law and the Gas Law. Not only are major gas companies preparing to conduct (and in some cases already conducting) business as wholesale and special-scale electricity utility supply businesses, but electric companies are investing more and more in the gas industry. Examples of the this include the following:
- Chugoku Electric commencing the wholesale supply of LNG to Yamaguchi Godo (September 2000);
- Tokyo Electric commencing wholesale gas supply to Ootaki Gas (January 2001);
- Kansai Electric constructing its own LNG receiving facilities;
- Chubu Electric and Kansai Electric announcing their intention to enter the retail gas market; and
- Chubu Electric and Hokuriku Electric preparing to establish jointly an LNG sales companies.
On the other hand, since the amendments were introduced, there have only been a small number of incidents where new entrants have sought to conduct large-scale supply, or GGBs have sought to conduct large-scale supply outside of their supply area. As in electricity, the US trade representative has been pressing METI for open access to LNG terminals and pipelines, and the vertical unbundling or separation of functions within the gas sector (towards total liberalization), arguing that the current amendments do not go far enough.
In conclusion, although the wheels in the reform process have begun to turn, it appears that there are many problems that must be overcome before the aims of deregulation can be achieved.
For further information on this topic please contact Paul Davis or Anne Hung at Baker & McKenzie GJBJ by telephone (+81 3 3403 5281) or by fax (+81 3 3479 4224) or by e-mail ([email protected] or [email protected]).
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