On-Site IR Report
This section provides responses to questions from investors and explains policies that are important in theconduct of management.
Q1 How does Tokyo Gas structure its rates?
The Company’s gas rate system is divided into the following three categories.
Service agreement	In cases in which Tokyo Gas supplies gas through the pipelines to meet general demand, the rateschedule is “regulated” under the service agreement used to require the approval of the Minister ofEconomy, Trade and Industry (METI). Under the amendments to the Gas Utility Industry Law in 1999,
however, it became possible to change these rates simply by notifying the Minister, provided thatthese changes do not adversely affect any customers.
Optional agreement	Tokyo Gas is permitted to offer rates and service terms other than those outlined in the above service
agreement. This enables the Company to make efficient use of its gas production and supply facilities
and to improve its management efficiency. These agreements must be reported to the Minister, andthe selection of this option is up to the customer.
Large-volume supply	Under the Gas Utility Industry Law, the conditions for gas rate setting and market entry for service
providers in the large-volume market are being gradually deregulated. Effective from April 2004,
customers who used 500,000 m3 or more qualified as large-volume customers. Moreover, fromApril 2007, the designation point for large-volume customers shifted to 100,000 m3 or more.
“Regulated” rates are calculated using a total cost principle*1. A simplified version of this calculation is given below.
Operating cost, etc.

+Fair return

Cost of gas resources*2
Depreciation
Personnel expenses
Non-operating expensesOverhead
Income taxes–Deductions, etc.

Calculated using the ratebasesystem, which involves multiplying
fixed-asset investments, etc., by
the appropriate ratio of fair return=Total fair cost

Profit from gas appliance sales, etc.
Profit from real estate business, etc.

Represents an appropriate profit
added to an appropriate cost underefficient management*1	Total cost principle: For a specific period (1 to 3 years), a fair return is added to the necessary and appropriate costs for the relevant period and gas rates are
set on that basis (total cost). In this way, rates are calculated in accordance with METI rules.
*2	Fluctuations in foreign exchange rates or crude oil prices are reflected in the meter rate every month in accordance with the gas resource cost adjustment
system. Consequently, the impacts of such fluctuations on revenue and expenditure will be neutral in the medium to long term.

Q2 What is the gas rate adjustment system?
The price of LNG is significantly influenced by crude oilcost fluctuations). The system is intended to increase rate

prices and exchange rate fluctuations. Consequently, thetransparency and to clarify the efforts of suppliers togas resource costs borne by city gas suppliers are substan-increase management efficiency.

tially influenced by changes in these areas. The gas rate

Under this system, the impact of fluctuations in gas re-adjustment system was introduced to promptly adjust gas

source procurement costs on the revenues and expenditures

rates*1 to reflect such exogenous factors (gas resourceof gas companies is neutral over the medium to long term*2.

*1	In general, gas rates comprise the base rate + specific unit price (unit rate x gas usage volume), and under the gas rate adjustment system, fluctuations inresource costs are reflected in the unit rate component of gas rates by adjustment amount.
*2	There is a time lag between the payment for gas resources and the reflection of the gas resource costs in gas rates. Consequently, in a single fiscal year,
there can be under-recovery or over-recovery in relation to gas resource costs stemming from fluctuations in crude oil prices and exchange rates.

C (Mar.–May)

3 month moving average(¥/t)(¥/Month)Upperlimit 160%

B (Feb.–Apr.)
Standard averagegas resource costUpper
limit 160%

C (Aug.)86,1006,318

B (Jul.)A (Jan.–Mar.)A (Jun.)53,8105,39812345678

Average gas resource cost (left)
Standard residential gas rates at monthly usage volume of 34m3 (45MJ/m3) (right)
The portion of the fluctuation in gas resource costs that exceeds 160% of the standard average gas resource cost is
not subject to gas rate adjustment.

42On-site ir report

9monthQ3 What processes are used by Tokyo Gas when making investment decisions?
Since fiscal 2003, Tokyo Gas has made decisions on new

Executive Committee or the Board of Directors. Derivative

businesses, the continuation of businesses, and exits fromtransactions are subject to market risk management rules.

businesses through Tokyo Gas Economic Profit (TEP), andCorporate Executive Committee meetings are held eachdecisions on investments through Net Present Value (NPV)week and are attended by executives at the senior execu-and Internal Rate of Return (IRR). These three indicatorstive officer level and above. Final decisions on important

are used as common standards throughout the Tokyo Gas

management issues are made after in-depth discussion, in-Group. TEP is an original evaluation method for ensuring

cluding deliberations by the Investment Evaluation Commit-that the amount of profit exceeds the cost of capital.

tee in the case of investment decisions. To follow theThe Investment Evaluation Committee assesses plans

results and monitor projects in which investments havethat involve investment, equity participation, or debt guaran-

been made, Tokyo Gas evaluates the situation regularly intees on the basis of risks and returns. The results of these

the Investment Evaluation Committee and reports findingsdeliberations are reflected in decisions at the Corporate

at the Corporate Executive Committee.

Q4 What is your relationship with Tokyo Electric Power Company (TEPCO)?
Tokyo Gas and TEPCO source about 70% of the total vol-TEPCO has moved into the gas market, and Tokyo Gas

ume of their LNG purchases from joint LNG projects andand TEPCO are engaged in the competition for gas demand.

are joint participants in projects based on upstream inter-Also, in the residential sector, the competition with all-ests. Joint purchasing strengthens our bargaining power,­electric systems has intensified. As a result of in-depth devel-

since we can contract for large volumes.
Two of our three LNG terminals, the Negishi and Sode-opment focusing on major sub-users and initiatives to build
close relationships with customers, centered on LIFEVAL,

gaura LNG Terminals, are operated jointly with TEPCO. This

which we completed the establishment of in fiscal 2009, weallows us to reduce capital investment and operating costs.

are working to hold the percentage of newly built houses

We can also improve operating rates through load levelingwith all-electric systems in our service area to a minimum.

based on differences between peak demand patterns forTokyo Gas responds to various forms of competition byelectric power and gas. These advantages are reflected ingoing beyond the supply of individual energy products, such

lower production costs per unit of gas.
At the marketing level, however, Tokyo Gas and TEPCO
are competitors. In the commercial and industrial sectors,

as gas and electric power. Our ultimate goal is to provide
our customers with optimal value by responding to theirreal needs, including their energy service needs.

TOKYO GAS ANNUAL REPORT 2010

43

Q5 What is the definition of the “Energy Service Business”?
In the energy service business, energy service providers

subsidiary, ENERGY ADVANCE Co., Ltd. The company oper-build and own facilities such as cogeneration systems, andates very efficiently by capitalizing on the LNG procurement

provide one-stop energy services, such as electricity andsystems and advanced engineering capabilities of the Tokyo

heat. This type of service is drawing attention on account

Gas Group, making the most of the high value added thatof its major advantages for customers. These include easecan be achieved with cogeneration systems. It targets envi-of implementation stemming from lack of need for a largeronmentally concerned customers, especially in the Kanto re-initial investment, a high level of environmental perfor-gion, where demand is high. This company’s energy services,mance, and reduced energy costs. Also, this is a field withwhich were introduced in 2003, have achieved the leading

growing appeal as a business due to improvements in sys-position in the industry, with 332 contracts at the end oftem efficiency.

March 2010.

In 2002, Tokyo Gas moved to expand its involvement in
the energy service business by establishing a wholly owned

Q6 What do you see as the role of the power generation business within the integrated energy business?
Tokyo Gas has established its power generation businessCurrently, we have four power plants in operation, or

as a multi-energy supply measure to provide all forms ofplanned (refer to the table below), with our share of gener-energy that customers require in a one-stop manner. We

ating capacity of 1,300 MW.

intend to achieve an optimal mix with facilities such as

Moreover, from a standpoint of developing renewablecogeneration systems.

energy, we installed a wind farm with a capacity of 1,990

Furthermore, we believe our power generation business

kW inside our Sodegaura LNG Terminal in October 2005.

has a number of strengths.

We are also constructing a wood chip biomass electric

1	It allows for competitive fuel procurement backed by ourpower plant with a capacity of 13,600 kW in Agatsuma-gun,bargaining power.

Gunma Prefecture, with the objective of starting operations2	Power plants are located close to demand areas utilizing

in fiscal 2010.

existing infrastructure such as LNG terminals.
3	Synergy effects with the gas business are possible,
such as improved terminal utilization rates and one-stopservices.
Tokyo Gas Baypower 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.
Ohgishima Power Co., Ltd.

840 MW(420 MW x 2 units)	1,220 MW(407 MW x 3 units)

In operation since April 2008
Unit No. 1 in operation
since March 2010
Unit No. 2 in operation since July 2010.
The timing for the commencement ofUnit No. 3 commercial operation has notbeen determined.

44

On-site ir report