Frequently Asked Questions

is your relationship with Tokyo Electric
Q:3 WhatPower Company (TEPCO)?

Q:1 How does Tokyo Gas structure its rates?
Service Agreement
In cases where Tokyo Gas supplies gas through the pipelines tomeet general demand, the rate schedule “regulated” under theservice agreement used to require an approval from the Ministerof Economy, Trade and Industry. Under the amendments to theGas Utility Industry Law in 1999, however, it became possible
to change these rates simply by notifying the Minister, provided
that these changes do not adversely affect any customers.
Optional Agreement
Tokyo Gas is permitted to offer rates and service terms otherthan those outlined in the above service agreement. This enables
the Company to make efficient use of its gas production andOperating cost, etc.
• Cost of gas resources• Personnel expenses• Overhead• Depreciation• Non-operating expenses• Income taxes＋Fair return

Calculated using the rate-basesystem, which involves multiplying fixed-asset investments,
etc. by the appropriate ratio offair returnsupply facilities. These agreements have to be reported to theMinister and the selection of this option is up to the customer.
Large-volume Supply
Under the Gas Utility Industry Law, the conditions for gas ratesetting and market entry for service providers in the largevolume market are gradually deregulated. Effective from April
2004, customers who used 500,000 m 3 or more qualified aslarge-volume customers. Moreover, from April 2007, the designation point for large-volume customers shifts to 100,000 m3or more.
“Regulated” rates are calculated using a rate-base system.
A simplified version of this calculation is shown below:−Deductions, etc.

• P rofit from gas appliancesales, etc.
• P rofit from real estatebusiness, etc.

＝Total fair costTokyo Gas and Tokyo Electric Power Company (TEPCO) source
about 70% of the total volume of their LNG purchases from joint
LNG projects and are joint participants in projects based on upstream interests. Joint purchasing strengthens our bargaining
power, since we can contract for large volumes.
Two of our three LNG terminals, the Negishi and Sodegaura
Terminals, are operated jointly with TEPCO. This allows us toreduce capital investment and operating costs, and we can also
improve operating rates through load leveling based on differences between peak demand patterns for electric power andgas. These advantages are reflected in lower production costs
per unit of gas.
At the marketing level, however, we are competitors. TEPCO
has moved into the gas market and is now a competing supplierof gas, especially for commercial and industrial use. We havealways competed with electric power in the residential market,
but in recent years this competition has intensified with theadvent of all-electric systems. In fiscal 2006 we successfully
implemented a range of strategies, including market promotions
for gas appliances, and in-depth demand development focusing
on major subusers. As a result of these initiatives, we are able
to hold the percentage of newly built houses with all-electric
systems in our service area to a minimum.
Tokyo Gas responds to various forms of competition by going beyond the supply of individual energy products, such as gas
and electric power. Our ultimate goal is to provide our customers
with optimal value by responding to their real needs, including
their energy service needs.

R epresents an appropriate profit
added to an appropriate cost
under efficient management* Price fluctuations in the foreign exchange rates and/or crude oil prices are reflected in the meter rate gas unit price every three months in accordance with thegas resource cost adjustment system (refer to page 5). Consequently, the impact of such price fluctuations on revenue and expenditure is neutral in the medium
or longer term.

Q:2 How are the rate adjustments carried out?
Tokyo Gas believes that our customers are important stakeholders, just like our shareholders. In the medium-term
management plan for fiscal 2006–2010 that we are currently
executing, we planned rate reductions with the objective of returning some of the savings from more efficient management
to our customers. In April 2008, we implemented the first rate
reductions since we started our current medium-term manage-28

ment plan. We determine the frequency and timing of rate revisions in light of the business and competitive environments atthe time, the progress of management streamlining and otherfactors. As for the particulars of the revisions, in order to maximize the benefits of the rate reductions, we invest resources
primarily in highly competitive sectors and for customers whouse large volumes of gas.

processes are used by Tokyo Gas when making
Q:4 Whatinvestment decisions?
Since fiscal 2003, Tokyo Gas has based decisions on newinvestments, the continuation of investments and exits frominvestments on Tokyo Gas Economic Profit (TEP), together
with Net Present Value (NPV) and Internal Rate of Return(IRR). These three indicators are used as common standards
throughout the Tokyo Gas Group. TEP is an evaluation methodto ensure that the amount of profit exceeds the cost of capital.
The Investment Evaluation Committee assesses plans thatinvolve investment, equity participation or debt guarantees on
the basis of risks and returns. The results of these deliberations
are reflected in decisions at management meetings or meetingsof the Board of Directors. Derivative transactions are subject tomarket risk management rules.

Management meetings are held each week and are attended by executives at the senior executive officer level andabove, as well as the two corporate auditors. Final decisions
on important management issues are made after in-depth discussion, including deliberations by the Investment Evaluation
Committee in the case of investment decisions. To follow theresults and monitor the invested projects, Tokyo Gas evaluatesthem regularly in the Investment Evaluation Committee andreports findings at the Management Report Meeting.

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Q:5

What is the definition of the “energy service business”?

Energy service providers build facilities to provide one-stopsources of energy services, such as cogeneration systems that
produce both electricity and heat. This type of service has major advantages for customers, including reduced energy costs
and ease of implementation, as there is no need for a large
initial investment. There are also significant environmentalbenefits. Efficiency improvements have turned the energy service business into a high growth area characterized by rapidly
improving profitability.
In 2002, Tokyo Gas moved to expand its involvement in theenergy service business by establishing a wholly owned sub-Q:6

sidiary, ENERGY ADVANCE Co., Ltd. The company operates very
efficiently by capitalizing on the LNG procurement systems
and advanced engineering capabilities of the Tokyo Gas Group,
making the most of the high added value that can be achieved
with cogeneration systems. It targets environmentally concerned customers, especially in the Kanto region, where demand is high.
It is the top company in its field, with a cumulative total of
208 contracts as of March 2008.

What do you see as the role of the power generation business within
the integrated energy business?

Tokyo Gas has established its power generation business asa multi-energy supply measure to provide all forms of energy
customers require in a one-stop service. We intend to achieve an
optimal mix with facilities such as cogeneration systems.
Furthermore, we believe our power generation business has
a number of strengths.
1 I t allows for competitive fuel procurement backed by ourbargaining power.

2 P ower plants are located close to demand areas utilizing
existing infrastructure such as LNG terminals.
3 S ynergy effects with the gas business are possible, such as
improved terminal utilization rates and one-stop services.
Currently, we have four power plants in operation, underconstruction or planned (refer to the table below), with a combined generating capacity of 2,400 MW.

Tokyo Gas Bay Power Co. Ltd.

100 MW

In operation since October 2003

Tokyo Gas Yokosuka Power Co. Ltd.

240 MW

In operation since June 2006

Kawasaki Natural Gas Power Generation Co., Ltd.

840 MW

In operation since April 2008

Ohgishima Power Co., Ltd.

1,220 MW

Commencing in March 201030

is your policy on the utilization of real estate
Q:7 Whatowned by Tokyo Gas?
Our core business is the integrated energy business, and we see
the real estate business as a support segment for this. Earnings
from the real estate business are used in core business activities. If there are opportunities to improve the asset value oflarge sites, we undertake appropriate development projects thatallow us to maximize the potential and value of those sites while
also minimizing risk.
In principle, development projects are funded from theproceeds of land sales, and care is taken to avoid any impact
on our integrated energy business. Risk limitation is a priority,

Q:8and our strategies in this area include joint development withoutside partners.
The Tokyo Gas Group has numerous business sites in theTokyo metropolitan area. We see effective real estate management as an important means of strengthening the competitiveness of our integrated energy business by improving efficiency
and reducing costs. For this reason, we are also actively targeting improvements in the efficiency of our real estate activities
and centralizing our facilities to achieve an optimal distributionof sites.

How have the Kyoto Protocol and emissions trading affected TokyoGas? What are the target CO2 reductions for the industry and how
are they allocated to each company?

The targets set down in the Kyoto Protocol for the reduction ofJapanese greenhouse gas emissions will require urgent action
to strengthen energy conservation, which is a key componentof countermeasures against global warming. Natural gas isexpected to play an increasingly important role in this context.
For example, the “Kyoto Protocol Target Achievement Plan” formulated by the government in April 2005 and revised in March
2008 acknowledges that natural gas produces the lowest CO2emissions of any fossil fuel during combustion and identifies theincreased use of highly efficient natural gas equipment and systems as an important way to combat global warming.

The needs and expectations of gas customers and society ingeneral toward natural gas are expected to expand still furtherin the future. The natural gas business is the core segment for
the Tokyo Gas Group, and this trend is seen as an opportunity toachieve further growth and development.
Under the Keidanren Voluntary Action Plan, the gas industry
is expected to reduce its CO2 emissions per unit and in terms of
total outputs. Tokyo Gas has made steady progress toward theachievement of these targets through measures that include a
conversion to high-caloric gas and the implementation of various
energy-saving initiatives at its city gas production plants.

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