IEEJ: August 2003
381st Regular Meeting for Briefing Research reports

June 19, 2003

New Gas Market Design in Japan- Lessons from reforms of gas retail sector in the United States Hideo Hasegawa, Senior Researcher
The Institute of Energy Economics, Japan< Research Objective >The Urban Heat Energy Subcommittee held meetings between September 2002 and February 2003 andthree principles, “Fostering efficient infrastructures for gas supply and effective usage of such infrastructure”,“Expanding and protection of gas users’ benefits”, and “Preparation of conditions for a fair market
competition” have been proposed as basis of gas market reform.
In the course of this subcommittee discussion, the basic policy components for the gas reform legislation
were determined, including: the redefinition of “pipeline operators” other than general gas utilities; applying
third party access obligation (including filing and disclosing tariffs) to all parties other than four major gas
utilities that own or operate pipelines for gas supply; the utilization of LNG receiving terminals by third
parties; expanding the scope of retail liberalization step by step and abolition of permission system in thelarge-scale gas supply to liberalized gas customers; the utilization of natural gas by community gas suppliers
currently using LPG; and securing fair competition in the reciprocal market entry by enterprises of different
energy sector.
Based on the discussions in the subcommittee, the amended Gas Utility Industry Law, which aims to further
deregulate and develop gas trading, was adopted by the Diet in June 2003, and the following new study phasehas begun in July in order to discuss how to design a detailed system that covers the various policy
components, including third party access and fair competition and trade.
This report summarizes recent changes surrounding gas business entities that have emerged in the course of
discussions on gas market reform, and also focuses future subjects on Japanese gas retail sector whilereferring to case studies abroad, particularly in the United States.
< Major Conclusions >1. In the meetings held by the Urban Heat Energy Subcommittee between September 2002 and February
2003, a wide variety of basic policy components for the gas market reform were determined.
From the viewpoint of the gas retail sector, more details of some policy components need to be discussed in
the future concerning securing transparency and neutrality of third party access, coping with diversified needsfrom third parties planning market entry through delivery services, providing last resort, and securing faircompetition in the course of the reciprocal market entry by enterprises of different energy sector through, forexample, the preparation of guidelines for fair competition between electric utilities and general gas utilities.
2. When gas retail cases abroad, particularly those of local distribution companies (LDCs) in the United States
are considered as references of such policy components left to be discussed more in detail, some differences
are observed in comparison to Japan. For example, the degree of flexibility and liquidity with respect to gas
procurement in U.S. is higher than that in Japan since interstate pipelines and gas storage systems are preparednationwide; and energy-related holding companies have some LDCs as subsidiaries as well as electricity andinterstate pipeline businesses.
On the other hand, many LDCs in U.S. provide gas delivery/distribution services for marketers while
holding sales functions. This is similar to the Japanese situation. With respect to the liberalization of theresidential gas retail business, which is a subject of future study in Japan, the implementation level is different
on a state-by-state basis in the United States and, therefore, a continued-factor analysis is indispensable.
3. Although respective states employ different approach on gas retail deregulation policies in the UnitedStates, several items can also be used as references in the future discussion of Japanese gas market reform; for1

IEEJ: August 2003
example, aggregation service, the selective delivery services of LDCs, requirements of marketers to utilizedelivery services (e.g. requirements on gas supply capability, estimation of gas demand of customers supplied
by marketers, balancing requirements, financial guarantee, and the like), and policies for providing last resort(e.g. customer type and additional charge of such service).
4. When an LDC is to execute its obligations, such as stable gas supply and “last resort” gas supply services,in the competitive U.S. market, relating risks are shared between the LDC and the marketers; for example, themarketers are required to certify that they have a gas supply capability and financial guarantees. Namely, gas
marketers do not necessarily enjoy easing regulations and we should take note of this point.

Note:- In summarizing the conclusions discussed in the meetings held by the the Urban Heat Energy
Subcommittee, the policy components that relate to the gas business (e.g. market entry, pricing) were focusedon and the regulations on safety were omitted from this report. Naturally, the subject was also discussed how
regulations on safety should be modified according to gas market reform.
- This report partially quotes descriptions from the “Detailed Investigation on U.S. Natural Gas Deregulatory
Reforms brought by Gas Retail Unbundling concerning LDCs” (executed in fiscal year 2002), which was
entrusted from the Gas Market Division, Electricity and Gas industry Department,. Agency for Natural
Resources and Energy, Ministry of Economy, Trade and Industry, after the permission of quoting by thedivision.

Pipeline operator: In this context, we refer to a business operator other than general gas utilities who owns oroperates pipelines for gas supply. For example, domestic natural gas developers (mining companies) orelectric utilities fall under this category.
LDC: An abbreviation of local distribution company. In the United States, the gas retail business has been
unbundled since around the middle of the 1980’s according to a step-by-step basis and LDCs provide
delivery/distribution services. It is reported that about 1,300 LDCs are participating in the gas retailbusiness.
Marketer: A business operator who mediates in the gas buying and resaling business. The marketer
participates in the gas retail market by utilizing LDCs’ delivery/distribution services, and there arevarious types of marketers, including affiliates of the oil majors or European energy businessenterprises (for example Centrica in the United Kingdom), affiliates of LDCs, and non-affiliatedenterprises. At least 260 operators are participating as marketers.
Different gas retail deregulation policies among states: For example, Oklahoma and Texas are typical gas
producing states and the gas price of residential customers is relatively cheap. In these states, the ratioof natural gas consumed in households to the total consumption is low, and the State Public Utility
Commissions in such states recognizes that the retail deregulation in residential sector would bring little
benefit. Colorado is also a gas producing state and the Gas Unbundling Legislation was established in
1999, but the effect of deregulation has not penetrated to the household level to a major degree due tolow natural gas prices.
Aggregation: An operation wherein a marketer/supplier provides energy services such as electric power orgas to aggregated multiple users.
Last resort gas supply: A gas service to ensure the supply of gas to users when gas users fail to conclude
supply agreements with new gas suppliers other than existing LDCs in the liberalized market or the
new gas suppliers cannot provide services due to some reason. Usually, LDCs provides this service.
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IEEJ: August 2003

<Explanation>
1. Discussions in the Urban Heat Energy Subcommittee and topics concerning the gas retailbusiness for future study
The Study Forum on Gas Regulatory Reform (a private study group assembled by the divisional heads ofResources and Fuel Division and Power and Gas Division, Ministry of Economy, Trade and Industry)
discussed and determined medium- and long-term strategies for each function of domestic gas chain1, e.g.
storage/delivery of LNG (LNG receiving terminal), transportation through pipeline, and retail, between
January 2001 and April 2002, based on the two fundamental principles of “expanding gas users’ benefits” andthe “sound growth of the gas industry”.
After the comprehensive study of this group was completed, further discussions were made to consider gas
market regulatory reforms by the governmental council called “Urban Heat Energy Subcommittee” ofAdvisory Committee for Natural Resources and Energy, between September 2002 and February 2003. In thecourse of the subcommittee, the above fundamental principles were maintained, but the “sound growth of thegas industry” was reclassified as “Fostering efficient infrastructures for gas supply and effective usage of suchinfrastructure” and “Preparation of conditions for a fair market competition” to re-coordinate the basic
directions of the gas market design.
Through discussions about “Fostering efficient infrastructures for gas supply and effective usage of suchinfrastructure”, some conclusions were made: (1) to redefine pipeline operators; (2) to introduce a proper
incentive, including assigning privileges which are permitted only to public utilities, in order to develop new
pipeline investment; (3) to expand the scope of the business entities who provide transportation/delivery
services; (4) to develop interconnection and resulting reciprocal use of pipelines; and (5) to allow third party
access to LNG receiving terminals.
With respect to the point “Expanding and protection of gas users’ benefits”, from the viewpoints ofincreased foreseeable regulations and minimized preconditions for market entry, some conclusions were
made: (1) to expand the scope of retail liberalization step by step and make its schedule clear; (2) to shift
permission system in the large-scale gas supply to notification; (3) to introduce a wholesale transportation
service; (4) to discontinue the notification system in the case of wholesaling by the specified deadline; and (5)to diversify the source of feedstock (including natural gas) to be selected by community gas suppliers. (SeeFigure 1.)
With respect to “Preparation of conditions for a fair market competition”, since both regulated andderegulated sectors co-exist in the gas utility during the transition period, it was concluded that: (1) the
regulatory bodies should be responsible for clarifying fair expense allocation standards between regulated,deregulated, and other business operations, and auditing the results of the allocation; and (2) the guidelines forfair trade should be drafted by assuming the reciprocal market entry by enterprises of different energy sector.
In addition, certain necessities were pointed out: (1) the administrative audit system, such as in rate caseprocedures, must be implemented more strictly; and (2) the market monitoring and dispute handling system
must be structured for the coming competitive market.

1

A process that contains consecutive events from the production of natural gas, liquefaction, transportation bytankers, storage, regasification, and transportation/distribution through pipelines to sales (wholesale and retail).

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IEEJ: August 2003

Figure 1 Major Items for Gas Market Reform
Redefinition of “gas pipeline operators”+ Introduction of privilege concerning
pipeline construction for public
interest
Introduction of incentive system forpromoting new pipeline investments

Expanded scope of business entities
who provide transportation services

Business entities who hold city gas feedstocks (e.g., natural gas)
(Electric power companies, steel companies, domestic natural gas business
operators, city gas utilities, and the like)Gas Wholesaling
Interconnection andresulting reciprocal
use of pipelines

Introduction of wholesaletransportation service
Discontinuation of notification
system by the specified
deadline

Large-volume gas supply
Negotiaed rates
Shift from permission to
notification

Phased liberalization of gas
retail business*

Large Volume Gas Supply
to out-of-territory users
Negotiated rates
Shift from permission to
notification

Third party access to
LNG terminals throughnegotiations among
related parties

Community
gas suppliers

Phased liberalization ofgas retail business*

Municipal gas utility B
Clarification of standards for constructing new
pipelines in areas with existing pipelines

Diversified source of feedstock selection for community gas
suppliers (i.e.natural gas)

Preparation of fair-trade guidelines, reinforcement ofadministrative audit functions, and structuring ofmarket monitoring and dispute handling system

Municipal gas utility A* Phased deregulation of gas retail businessCurrent situation:

Gas is retailed to users whose contracted annual consumption is at least 1,000,000 m3.
(Market opening2: approx. 40 %)Target for 2004:

Gas will be retailed to users whose contracted annual consumption is at least 500,000 m3.
(Market opening: approx. 44 %)Target for 2007:

Gas will be retailed to users whose contracted annual consumption is at least 100,000 m3.
(Market opening: approx. 50 %)Source: “Desirable Future Regulatory Framework for the Gas Industry”, Urban Heat Energy
Subcommittee, Advisory Committee for Natural Resources and Energy, 4th meeting, 20 February
2003.
When emphasis is placed on the regulatory reform of gas retail sector, it will be necessary in the future to
design a more detailed system that can clarify the delivery/transportation service, cope with diversified needs
on such service, provide last resort gas supply, and define proper rules for the reciprocal market entry byenterprises of different energy sector, for example, the preparation of guidelines for fair competition between
electric and general gas utilities. (See Table 1.)

2

The degree of deregulation above is calculated from the data of the top ten gas suppliers in FY 2000.

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IEEJ: August 2003
Table 1 Subjects for Future Detailed Study concerning Gas Regulatory Reforms (Retail Sector)
Item

Description
It is necessary to ascertain measures that ensure fair competition between the general
Clarity of gas gas utilities that operate gas supply networks and other gas business entities who
utilize those networks. (Actions to be taken include: introduction of a separate incomedelivery/transportation and expenditure accounting system on delivery/transportation service; prohibit
network operators from using business information obtained from providing gas
systemdelivery/transportation service for other purposes (firewalls on information); and toprohibit discriminatory treatments.)
In principle, the charges for gas delivery/transportation service should be calculated
Diversified
cost of service basis. Also, it is desirable to hold flexibility of pricing by taking into
needs on gas
consideration the utilization efficiency of the pipelines (for example, load factor anddelivery/transportation congestion of pipelines) and supply needs of customers.
service
Liberalization For household and small commercial customers in which the contracted annual
consumption volume is less than 100,000 m3, viability of liberalization should beforsmall-volume studied by evaluating phased deregulation, change of gas procurement, foreign casestudies, and the progress of deregulation in other energy sectors.
customers
If a liberalized customer in the service area has not concluded a contract with gas
Last resort gas supplier other than general gas utilities and that the customer wishes to return to theexisting gas utility’s gas service under its tariff, the gas utility has an obligation to
supply toliberalized gas serve to the customer (Article 16 of the Gas Utility Act). With further deregulation in
the future, it is assumed that it would be more burdensome for general gas utilities tocustomers
maintain reserved supply capacity and, therefore, it is necessary to structure aframework so that last resort gas supply can be ensured.
Example: Establishing fair competition due to reciprocal market entry by electricutilities and gas utilities
It is necessary to prepare guidelines and other rules in cooperation with the METI and
the Fair Trade Commission so that a business entity can introduce separated
Fair
accounting and firewall systems (e.g. on information) between its main businesscompetition
operation (sales of electricity or gas) and other business. What type of activity will
result in a violation of the Antitrust Law must also be identified in view of fair traderequirements.
Sources:(1) “Desired Future Regulatory Framework for the Gas Industry”, Urban Heat Energy
Subcommittee, 4th meeting, 20 February 2003;(2) 4th meeting of Gas Policy Working Group, 13 December 2002.

2. Recent Changes Surrounding Gas Utilities
In parallel with the progress of discussions on gas regulatory framework, there have also been changes
surrounding the gas utilities: the number of new gas suppliers providing large volume gas supply has
increased. As of the end of FY 2002, thirty-eight large-volume gas supply plans by other than general gas
utilities received permission, or made notification, to enter the gas supply business. Thirty-three of these newplans are supplying energy within the service areas of general gas utilities, and sixteen of these thirty-three
supply plans are utilizing the pipelines of the existing general gas utilities.
The supply volume of these new entrants accounted for some 2% of the total large-volume supply in FY
2001, and it is estimated that this figure will rise to 4 or 5% in FY 2002.
On the other hand, it is expected that cost reductions through managerial effort of general gas utilities will
steadily proceed as a result of these new gas suppliers’ market entry as well as under the influence ofcompeting electric utilities. When focusing on the major three gas utilities and electric power companies forexample, total assets tend to drop from FY 2001 due to a decrease of capital investment. Since the sales
expenses per volume of gas sold (or electric power) decreased due to cost reduction through managerial
efforts, it is expected that the retail price will continue falling and price competition will be accelerated. (SeeFigure 2.)

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IEEJ: August 2003
Figure 2 Past Trends in Capital Investment, Assets, and Sales Expenses Per Gas Volume/ElectricalPower Sold in the Three Major Gas Utilities/Electric Power Companies

Capital investment index: 1995=1.0

Total asset index: 1995=1.0

1.6

1.8

1.4

1.6

1.2

1.4

1.4
1.2
1

1.2

1
0.8
0.6

1

0.8

0.8

0.6

0.6

Capital investment index:1995=1.0

1.4
1.2

Osaka Gas

0.2

2000

1994

1992

2000

1998

0

1998

Toho Gas

Toho Gas
1994

2000

1998

1996

1994

1992

0

Tokyo Gas

1996

0.2

Toho Gas

1992

0.2

0.4

Tokyo Gas
Osaka Gas

0.4

Osaka Gas

1996

Tokyo Gas

0.4

0

Sales expense index per gas volume
sold: 1995=1.0

Sales expense index per electricity sold:1995=1.0

Total asset index: 1995=1.0

1.2

1.2

1

1

0.8

0.8

0.6

0.6

0.4

0.4

1
0.8
0.6

Tokyo Electric Power

2000

1994

Kansai Electric Power

0

1992

1994

0

1992

2000

1998

1996

1994

1992

Chubu Electric Power

Kansai Electric Power

Kansai Electric Power

0Tokyo Electric Power

0.2

1998

Chubu Electric Power

2000

0.2

0.2

1998

Chubu Electric Power

1996

Tokyo Electric Power

1996

0.4

Notes:
Capital investment index: The capital investment of each fiscal year is expressed in the form of an index bydefining the investment in 1995 as 1.0 (base index). For gas utilities, three items (investments on
manufacturing, supply facilities, and offices) are subject to capital investment. For electric utilities,
those items other than main business operations, such as information and communication businesses,
are excluded from capital investment.
Total asset index: The total assets of each fiscal year are expressed in the form of an index by defining the assets in1995 as 1.0 (base index). In these charts, the assets of single companies are used instead of aconsolidated account.
Sales expense index per gas volume/electrical power sold: The sales expense divided by the gas volume orelectrical power sold is expressed in the form of an index by defining the figure in 1995 as 1.0 (baseindex). For gas utilities, sales expenses consist only of sales, supply, and administrative costs.
Sources: IR documents, Database of the Federation of Electric Power Companies (http://www.fepc.or.jp/tokei/)
In addition to managerial efforts, some gas utilities explicitly announce to become “multi energy suppliers”

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IEEJ: August 2003
via participation in other energy sectors, particularly electricity and LPG-related businesses. (See Table 2.)
In some gas utilities, mid-term business plans include options of business expansion through improvementof the gas supply chain: for example, the development of gas wells, the improvement of facility load factor
through providing TPA (Third Party Access) services to LNG terminals and pipelines, and provision ofvarious customer services (such as services aiming at energy-saving, and comprehensive facility related
services from its introduction to maintenance).
Table 2 Participation in Other Business Sectors, Cooperation, and Merger by Gas Utilities
Item

Description
In November 2001, Tokyo Gas and Nippon Oil Corporation jointly undertook construction of anatural gas power station in Kawasaki (capacity: 900,000 kW, planned startup: 2008).
Osaka Gas undertook construction of the Senboku Natural Gas Power Station (capacity: 400,000
Participation
kW × four units, planned startups: 2008 and 2010)
in the power
In December 2002, Osaka Gas’s affiliate, Gas & Power Investment acquired the equities of two
generationcompanies holding IPP plants, Nakayama Kyodo Hatsuden (149,000 kW) and Nakayama Nagoya
business
Kyodo Hatsuden (149,000 kW).
In December 2002, Tokyo Gas bought Showa Bussan (capital: 48,000,000 yen, number ofParticipation
customers: approx. 10,000).
in the LPG
In September 2000, Osaka Gas acquired a 70% shareholding in Nissho Iwai Petroleum Gas
business
Corporation.
In October 2002, Tokyo Gas, Shizuoka Gas, and Teikoku Oil announced that they would jointly
construct pipelines.
In May 2003, Hiroshima Gas and Fukuyama Gas established a joint company to construct a
Cooperation
pipeline.
with other
In November 2002, Tokyo Gas, in cooperation with wholesalers, manufacturers, and its affiliates,
gas utilities
established “Gas Network Consortium 21” to investigate countermeasures against electrification,and LPG
sales improvements, and other business issues.
suppliers* In January 2003, Tokyo Gas, together with LPG suppliers, established a consortium, “G Line”, tocope with electrification.
Source: Material prepared by the Institute of Energy Economics, Japan.

3. The Gas Retail Sector in the United States
When considering the future of the gas retail system in Japan, an understanding of the current situation inforeign countries, particularly that of LDCs in the United States, will be helpful. In U.S., with a background ofdomestic natural gas resources and widely developed interstate pipelines and gas storage systems, acompetitive wholesale market has been formed under “gas to gas competition”.
From the institutional viewpoint, orders issued by the Federal Energy Regulatory Commission (FERC)
prohibit interstate pipeline operator from sales functions (i.e., the operators are allowed to only transport gas)and promote secondary trading of pipeline excess capacity. In summary, a higher degree of flexibility andliquidity are ensured for the procurement of gas in U.S.
Some LDCs, together with marketers, electric utilities and interstate pipeline operators, are formed into
energy holding companies. Such differences from Japanese case need further consideration in evaluating any
influence on Japanese gas utilities who may lose customers as a result of market competition. (See Figure 3.)
Although there are some differences between the U.S. and Japan, as discussed above, many U.S. LDCs
provide gas delivery/transportation services for marketers while maintaining their sales functions, and this issimilar to the Japanese situation. With respect to liberalization of the residential gas customers, a subject for
future study in Japan, the implementation level is different among states in the United States and, therefore,
continued factor analysis is indispensable. (See Table 3.)
For example, Oklahoma and Texas are typical gas producing states and the residential gas price is relatively
inexpensive. Furthermore, the ratio of natural gas consumed in households to total consumption is relatively
low in these states, and the State Public Utilities Commissions recognize that the liberalization of residential
customers would bring few benefits. Colorado is also a gas producing state and the Gas Unbundling
Legislation was established in 1999, but has not penetrated into household level due to low natural gas prices.
Some states, for example Delaware and Wisconsin, canceled deregulation pilot programs targeting
residential gas customers, because of natural gas price volatility and unpredictability, and resulting stagnating
market entry by marketers.

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IEEJ: August 2003
Figure 3 Natural Gas Supply System in the United States

Natural gas wellInterState pipeline

BypassDistribution
pipeline
Citygate

Interstate gas transaction(under federal regulation)

Gas retail business by LDCs and marketers(under state regulation)- Domestic natural gas resources and nationwide
interstate pipelines and gas storage systems-> “Gas to gas” competition, development of gas
transaction points (Hubs)- LDCs provide gas delivery/transportation services
while maintaining sales function.
* Atlanta Gas Light in Georgia is an exceptionalcase.

- Deregulation by the FERC-> Prohibition of interstate pipeline operators fromgas sales (only gas transportation), secondary tradingof pipeline excess capacity (Order636)- The rate setting of the LDCs is regulated by the State
Public Utilities Commission.
- Marketers are partially regulated by the PUC withrespect to requirements on market entry, but the rates
are not regulated. (LDCs may own the marketers asaffiliates.)
Source: Material prepared by the Instituteof Energy Economics, Japan.

Higher degree of flexibility and liquidity
for gas procurement

Table 3 Liberalization of residential gas customers – State-by-State Progress of Deregulation in U.S.
Degree of deregulation
Statewide unbundling
100% eligibility
Statewide unbundling
implementation phase
Pilot program/ partial unbundlingNo unbundling- considering action
No unbundling
Pilot program
discontinued

State
Washington D.C., New Jersey, New Mexico,
New York, Pennsylvania, West Virginia
California, Colorado, Georgia, Maryland, Massachusetts,
Michigan, Ohio, Virginia
Florida, Illinois, Indiana, Kentucky, Montana, Nebraska,
South Dakota, Wyoming
Iowa, Kansas, Maine, Minnesota, Nevada, New Hampshire,
Oklahoma, South Carolina, Texas, Vermont
Alaska, Alabama, Arkansas, Arizona, Connecticut, Hawaii, Idaho,Louisiana, Mississippi, Missouri, North Carolina, North Dakota,
Oregon, Rhode Island, Tennessee, Utah, Washington
Delaware, Wisconsin

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IEEJ: August 2003
Notes:- States with double underlining were investigated by IEEJ in FY 2002 and those withsingle underlining were investigated in FY 2001.
- Pilot program: LDCs open the market with the permission of the state to evaluate theinfluence of the liberalization of residential gas customers. The period of
the program is defined before the execution of the pilot program (forexample, one or two years) and extended whenever necessary.
Source: Energy Information Administration (U.S. Department of Energy) Homepage

4. Conclusion: Consideration on Future Japanese Gas Regulatory Reform Based on Case
Studies of the United States
There is a precondition that the approach to the deregulation of gas retail sector is different on astate-by-state basis in the United States, but when viewing the activities of individual states it can be seen that
there are many examples that may be references to discussions about future Japanese gas regulatory reform.
These include: aggregation (an operation wherein a marketer/supplier provides gas service to aggregatedmultiple customers); variations of gas delivery/transportation charges according to the type of customer,
contract style, or competitive alternate fuel price condition; requirements of the marketer by the PUC or LDC
upon utilization of gas delivery/transportation services (gas supply capability, estimation of demand,
marketer’s flexible correspondence to customers load curve, financial guarantee, and the like); and policies forlast resort gas supply (targets of customers, additional cost on providing such supply). (See Table 4.)
When an LDC is to execute its obligations, such as stable gas supply and last resort gas supply, in thecompetitive U.S. market, risks are shared between the LDC and marketers: for example, the marketer isrequired to certify its gas supply capability and financial guarantee3, and in some states a certain capacity of
the interstate pipeline committed by existing LDCs is mandatorily assigned to the marketer to ensure its gas
supply capacity without fail and to avoid creating stranded costs in the LDC4. These examples show that newmarket entrants do not necessarily enjoy easing regulations and, therefore, these points should be given due
consideration5.
In some cases, both electric power companies and gas suppliers may be affiliated with same energy holding
companies in the United States and, therefore, policies of fair competition through the reciprocal market entry
by enterprises of different energy sector are not clearly analyzed in this report. The ideas of the regulatory
bodies in each state should be studied in more detail in the future.
In addition, it may be necessary to research about the adequacy of a new market entry by a business entitywith high market share in its main business operations, by referring the fair trade guideline6 for thetelecommunications sector in Japan, other than focusing only on foreign case studies.

3

Specifically, certification activities include the submission of financial statements or letters of credit, payment of
security bonds, and presentation of surety bonds.

4

When a marketer participates in the gas retail market, it must secure a certain level of capacity on the interstate
pipeline and conclude a gas delivery/transportation agreement with an LDC.
5With respect to the so-called “balancing period” (the concept that supply must agree with demand within a given
period) that is required of the marketer in gas delivery/transportation service, it is desirable to ease the balancing
requirement (currently one-hour period) for market entrants. To do this, it is necessary to consider various factors,
such as the mechanism of market demand in Japan, temporal and seasonal demand changes on the network used fordelivery/transportation service, the form of the gas supply network, and supply backup capability.
6“Guideline for Promotion of Competition in the Telecommunications Business Sector”, Fair Trade Commission
and Ministry of Public Management, Home Affairs, Posts and Telecommunications.

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IEEJ: August 2003

Table 4 Useful/Unrelated Case Study Results in Research of the U.S. Gas Retail Business
Study results that are useful or need more consideration{ Gas delivery/transportation service
Charging
United States: Charges are determined after taking into consideration demand type, contract style(Firm, Interruptible), and competitive fuel prices*.
* Targeting those users to which other fuel alternatives can be supplied (none-core users).
Japan: Delivery/transportation charges are not determined by demand type or contract style.
Gas metering
United States: Not all market entrants estimate their customers’ demand. For small-volume gas users
such as households, the LDCs estimate and notify on the necessary supply volume.
Japan: Gas delivery/transportation service is limited to only large-volume customers and gas ismetered through a tele-metering system. Each gas business entity must estimate its
customers’ demand.
Balancing period
United States: The supply and demand balance is generally controlled on a day-to-day basis.
Japan: The supply and demand balance is basically controlled by the hour.
Requirements for utilizing gas delivery/transportation service
United States: The new gas business operators are required to certify their gas supply capabilities
during the winter season, as well as financial guarantee, by the PUC or LDCs. In
some state, interstate pipeline capacity is mandatorily assigned to marketers.
Japan: If the delivered gas volume does not meet the (contracted) demand of users,
compensation or backup charges are imposed to suppliers. However, certification of gas
supply capability and financial guarantee is not required; in case of default, thetransportation/delivery service agreement is canceled and the supplier must compensate
the existing gas utility, if necessary.
Information restrictions between transportation/delivery service and retail service (including
retail business by affiliates)
United States: The clause that prohibits network operators using information obtained fromtransportation /delivery services to other purposes (e.g. for the benefits of sales
affiliates) and also forbids the staff of transportation/delivery service taking in chargeof gas sales function at the same time under “Code of Conduct” in the LDC’s tariff.
Japan: The transportation/delivery agreement prohibits using sales information obtained fromtransportation/delivery services in other purposes.
{ Last resort gas supply
In principle, each existing LDC must bear the responsibility of last resort gas supply (except the case ofGeorgia). Target users and supply conditions (for example, whether the rate for the last resort gas
supply is higher than the regular LDC rate or not) are different in each state.
Example: Core customers are to be served (New York, California)
Only residential customers are to be served (Virginia)
Residential and commercial customers are to be served (Nebraska){ Aggregation Service
United States: Some states (for example, Ohio) adopt aggregation service at the community level.
Japan: The basic principle of the transportation/delivery service agreement is “one receipt
point and one delivery point”, and the concept of aggregation is not applied.
Unrelated study results{ Fair competition between electrical power companies and general gas utilities→ Information is too limited for proper research on this subject.
{ Stranded costs (relating to gas procurement and others)→ The gas procurement cost is mainly comprised of the commitment relating to interstate pipelines in
U.S. There are secondary trading relating to a pipeline’s extra gas transport capacity, and the gas
supply system in the United States is extremely flexible, so information of U.S. case is not so
instructive to Japanese case.
Source: Material prepared by the Institute of Energy Economics, Japan.

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