USA | Japan Examines Future of Tepco

Posted on July 9, 2011

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USA | WALL STREET JOURNAL | 9 July 2011

TOKYO—A government-led panel looking into the future of Tokyo Electric Power Co. is keen to wrest monopoly power away from Japan’s largest utility, but it has for now put aside more radical proposals to break up the company and sell off key assets, panel members and government officials said.

The problem facing officials is how to ensure that Tokyo Electric remain for the long term a viable shareholder-owned company that is able to provide electricity at a reasonable cost while paying off the estimated trillions of yen in compensation to those affected by the disaster at its Fukushima Daiichi nuclear power plant.

Government officials said one “quick fix” solution now appears to have been dropped. That plan centered around making Tokyo Electric, also known as Tepco, divest its transmission networks, which are estimated to be worth as much as ¥5 trillion ($62 billion), enough to handle the likely compensation claims from the nation’s worst-ever nuclear accident.

A person close to a senior government official who favors such a plan said the government won’t push for it at present as it doesn’t want to panic the markets but that a breakup is only a matter of time as the company runs out of cash under the weight of compensation payments and other costs.

“We’re basically waiting for the natural death of Tepco,” the person said, a move that would likely wipe out shareholders and force banks to accept debt waivers.

Although a “quick fix” divestment of Tepco’s grid now appears to be off the table, the panel’s own ideas would still represent major changes for the company—and potentially the rest of the industry.

“The panel’s goal is to craft a new business model for Tepco for the next 10 years,” a person familiar with the panel’s discussions said. “Our main focus is on how to run a utility more efficiently. Tepco is going to be our test case.”

In a concept paper published last month, the panel signaled an approach that would allow the company’s current capital structure to remain intact but with a separation of its operations to create greater competition.

“I think it is feasible if the issue is about selling off the power generation networks and using that money for the compensation scheme in order for Tepco to survive,” said Mana Nakazora, a chief credit analyst at BNP Paribas Securities in Tokyo.

Japan’s utilities have maintained their regional monopolies even as Europe and the U.S. underwent extensive deregulation beginning in the 1980s. In Europe, utilities are free to share power across national boundaries, whereas different frequencies used in eastern and western Japan dating back to the earliest days of electrical grids have limited cooperation.

Tepco argues there are unforeseen risks in any breakup. “A fully liberalized market could make it difficult to promote policy goals, such as development of renewable energy,” a Tepco official said when asked about the issue of broader competition in the industry.

Even government officials in favor of deregulation are worried that a hasty push for a break-up would create more problems than solve, and they urge more careful planning.

“Separation of power generation and distribution, without a rigorous competition policy, would neither generate competition nor lower electricity prices,” said a senior official at the Ministry of Economy, Trade and Industry.

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