IEEJ: August 2005

The 391st Regular Research Briefing Session

May, 19, 2005

Report Summary

Current status and Evaluation of Electricity
market liberalization in Japan, USA and Europe
Junichi Ogasawara
Group Leader, Electricity, Nuclear, Coal Group Industry Research Unit
<Research Purpose>
The Electricity Utility Industry Law was revised in fact after all of 31 years in 1995,and electric industry reform was started in Japan following Europe and USA. After
that, the law was revised secondly in 1999 and thirdly in 2003, then a great change
has been introduced in electricity industry system, like partial liberalization of retailassociated with an entry of PPS (Power Producer and Supplier), and establishment ofPower Exchange and Neutral System Organization.
On the other hand, an investigation on further system reform is planned to be
started from 2007, including full retail liberalization, after 10 years from the start ofelectricity industry reform in Japan. It is considered a good opportunity to review thecurrent status of electricity industry system reform in Japan. Therefore, this study isaiming to get a future prospect through reviewing on four criteria of (1) liberalization
scheme, (2) efficiency, (3) progress degree of competition, and (4) stable supply.
* This study is based on the 2004 contract research, “Current status andEvaluation of Electricity and Gas Market Liberalization (Comparisons between
Japan, USA and Europe)” from the Committee for Energy Policy Promotion.
<Main Conclusions>(1) Japan selects step-by-step electric industry reform, then (1) in comparison withliberalization scheme, the requirement is not fully fulfilled from European andAmerican view point, (2) from the view point of efficiency, through step by step
revision of electricity price, over 20% price down is realized since start ofliberalization (TEPCO), electricity price is stably falling down and approaching tomajor European and American utilities’ price level, and it can be judged that at
the present stage, Japan’s system reform is stably attaining a good result ofefficiency. On the other hand, (3) the change rate of supplier is remaining at lowlevel, in spite of uneven distribution in locality and a sort of consumers, and (4) it-1-IEEJ: August 2005

is evaluated that stable power supply is of no problem for the present, the futureissue is what kind of framework should be established in a case that a furthersystem reform is carried out in the electricity industrial juristic circumstances
different from Europe and America.
(2) The followings are the points in the discussion of system reform including full
retail liberalization planned in 2007, (1) the new framework after 2003’s revisedElectric Utility Industry Law, especially, could the Neutral System Organization
and Power Exchange accomplish an expected function? (2) What kind of disputes
can occur under the new framework? (3) taking account of the difference offramework between Japan and USA or Europe, and being compatible with theother political problems like promotion of efficiency and nuclear or renewable
power source which are the objectives of electricity system reform, how can weestablish the framework of long term stable power supply, under the completely
new framework of the reform associated with maintaining present scope ofliberalization, or full range of liberalization.
<Explanation>(1) Taking account of comparison with the liberalization scheme, the degree ofachievement was demonstrated, in comparison with system reforms carried outin Europe and America concerning liberalization. In Europe and America, theconcept of “standard market design” is getting to be popular, however in Japan,
the difference is prominent especially in unbundling of network sector(transmission and distribution), as a result, it was found that only few
requirements of standard market design were fulfilled. But in case of Japan,
relative to Europe and America, the compatibility between public beneficial
issue such as energy security, and electric industry reform is more severely
considered, then step by step system reform is adopted, therefore it isnecessary to evaluate the final scheme of the system.
(2) From the view point of efficiency, one of the objectives of electricity industry
system reform was to realize a reasonable electricity price at the international
standard. We carried out present status evaluation. It is found that Japan’s
electricity price level is approaching to the representative utilities of France,
Germany, United Kingdom and the USA, diminishing differentials, and getting
to equal or lower in comparison with New York area of the USA. Concerning
the changing trend of electricity price after the start of electricity industry
reform, an up-down fluctuation can be seen in European and American market,-2-IEEJ: August 2005

in case of Japanese market, after 5 times of price revisions, TEPCO realizing
more than 20 % of price down, the trend is consistently falling, then the stableand efficient development has been achieved.
(3) From the view point of degree of competition, the comparison of customer
choice switch rates. At first in the USA, it is found that the switching rate is
greatly different between the state where a competition is promoted, and thestate where restoration of profit from liberalization to consumer is encouraged.
In Europe, it is found that the changing rate is high in the country, like UK,
which initiated liberalization in advance, and because Europe is aiming thesingle market, the market concentration measure and the foreign capital
market share are adopted as comparative items. In Japan, because theun-symmetric regulation as in the USA is not introduced, the share of PPS is
low-lying 2.30% for consumers of liberalization objective (at the time ofFebruary 2005), however the changing rate of business consumer inmetropolitan area is high, therefore uneven distribution locally exists.
(4) From the view point of stable supply, the comparison between the framework ofsupply reliability maintaining and the reliability assessment which is carriedout in local reliability councils. As an overall framework, the company iscertificated for each function necessary for reliability maintenance in the USA,on the contrary the reliability organization is positioned as an adjustment
place in Europe and Japan. The framework of stable supply is legally of great
difference, between Europe, America and Japan, therefore the applicable
scheme for Japan could be limited. As for middle and long term prospect ofpower supply, ensuring a long term supply is getting to rely on the market
principle, depending on the preeminence of the market of power-generating
sector in the USA. Therefore, the review of evaluation method was done in theUSA, and it was confirmed that an expectation for the interconnection line as aavailable supply power was enhanced in Europe. In Japan, the reliability
assessment report has been published by the Electric Power System Council ofJapan (ESCJ), then it is evaluated that an enough supply power exists.

-3-IEEJ: August 2005

<Data>
Table1 Comparison of liberalization model between Japan, USA and Europe
EUElectricity regulation reformof EU-wide started in 1996,
according to EU Electricity
directive. The enforcement
time of regulatory reform wasvarious depending on thecountry. (liberalization ofUK started in 1990)
Realization of single market
following
EUeconomic
integration
No regulation in all EU. But,
most of countries have powerexchange.

USA
Reform of generation andtransmission sectors started
following order 888 in 1996.
The other sectors were carriedout separately by the state.
(partialliberalization
wasstarted at Rhode island in1997.)
Correction of electricity pricegap among the statesJapan
Overall reform of electricity industrywas started according to revision ofElectric Utility Industry Law in1995. Retail liberalization wasstarted March 2000, according to
1999’s revision of Electric Utility
Industry Law.

RTO
foundedmandatory
energy market within its area.
(so to speak “pool market”)

Unbundling oftransmission
sectorFunctional and accounting
unbundling were obliged by
1996 EU directive. The legal
and functional unbundlingwere obliged by 2003 EU
directive.

Scope of retailliberalization

Full liberalization is obliged
to start by 2007. Especially,
UKandGermany
hasalreadystarted
fullliberalization.

Functional and accountingunbundling were requested by
1996 order, however a wide
area transmission organization
RTO was proposed by 1999
order 2000. The northeastern
PJM ISO, Midwest ISO areapproved as RTO.
There is no unified movement
atFederallevel.
Fullliberalization was carried out
in the most states of thenortheasternarea.
Thesoutheastern area is notliberalized.

Japan electric power exchange(JEPX), a non-mandatory typeexchange, started operation from
April 2005.
The accounting unbundlingandinformation isolation were obliged
by the 1999 amendment of theElectricity Utility Industry Law. The
enforcement of regulation on action
was carried out by the 2003
amendment.

The year ofliberalization
start

Main purposeofsystem
reformFramework ofwholesalemarketCorrection of gap between domestic
and foreign price

Liberalization was carried out forhigh or more voltage consumers
April 2005. The discussion on thereview
ofsystemincludingappropriateness of full liberalizationis scheduled to start in 2007.

Table 2 Evaluation of Japan’s regulation reform from the European and USA’s viewpoints

Generation
marketTransmission
SectorFounding of Power Exchange(energy market)
Adoption of LMP method
Obligation of ensuring resources to supply for retail company
Establishing of balancing market
Establishing of ancillary service market
Unbundling of accounting
Unbundling of decision making
Legal unbundling
Ownership unbundling
Establishing energy market
Establishing of a wide area independent operator (RTO)(*1)

Retail sector
Regulation

Solution of pancake problem
Reliability regulation
Full liberalization
Establishing of last resort service supplier
Establishment of independent regulatory authority

Number of circles from each assessment axis

*1

*2

Europenecessary
unnecessary
unnecessary
necessarynecessarynecessarynecessarynecessary
unnecessary
unnecessaryunnecessary
necessarynecessarynecessarynecessarynecessary(*2)

USAnecessarynecessarynecessarynecessarynecessarynecessarynecessary
unnecessary
unnecessary
necessarynecessarynecessarynecessarynecessary

4/11

4/12

Japan

○××××
○
×××××
○
○××

“Pancake problem” means a special charge which is assigned to wide area trade, for example inJapan, the transfer charge crossover multiple general utilities supply areas is that. (It wasdecided with 2003’s amendment of Electricity Utility Industry Law to be abolished by April
2005.)The independent regulatory authority mentioned here is the one which is obliged to establish
for each country government. It doses not mean that the authority is independent from decision
making of competitive policy in EU’s overall energy policy.

-4-IEEJ: August 2005

Table 3 Comparison of Power Rate (Japan’s level normalized to each company) (in 2004)
EDF
RWE
PG
LEConEdComEd
TXU(France) (Germany) (UK) (UK) (NY,USA) (IL,USA) (TX,USA)Home
Middle
scale
Large
scale
Ultra-large
scale
(*1)

0.81
1.07
0.90
1.22
1.07
1.41
1.24

1.11
(*2)
1.83
(*2)
1.53
(*2)
2.52
(*2)
2.21(*2)
2.47(*2)
2.17

business
Industrybusiness
Industrybusiness
Industry

1.53
1.46
1.22
1.58
1.39
1.88
1.65

1.45
1.49
1.24
1.57
1.37
1.84
1.61

1.03
0.98
0.82
1.05
0.92
0.94
0.83

1.59
1.56
1.31
1.66
1.46
1.49
1.31

1.66
1.42
1.19
1.60
1.40
2.16
1.90

EDF is France, RWE is Germany, PG (PowerGen (E.on))· LE (London Electricity (LE Group)) are
United Kingdom, ConEd (Consolidated Edison: the state of New York)· ComEd (CommonwealthEdison (Exelon): Illinois state)· TXU (the state of Texas ) are US utilities. Japan is TEPCO.
EDF electricity price does not include tax and others, excluding home use.
Numeric numbers indicate the ratio of Japan’s electricity price assumed the price of eachcompany to be unity.

(*2)
(*3)

Figure 1International comparison o electricity price (in 2004)
yen/kWh
30.0

27.5

yen/kWh
20.0

Home use

Middle scale use
18.0

25.0

22.1

15.1

16.0

21.5

19.9

14.0

20.0
14.4

12.0

15.3

13.9

15.0

13.4

18.4

16.8

18.0

12.3

12.1

PGLE

11.5

12.7

9.8

10.0
8.0

10.0

6.0
4.0

5.02.00.00.0
TEPCO

EDF

RWE

Basic priceyen/kWh
18.0
16.0

PGLEConEd

Energy price

ComEd

Basic price

Large scale use

12.0

14.0
10.0

10.1

10.0
8.0

9.5

9.9

TXU

16.2

13.4
10.8

12.0

8.0

6.0

6.0

4.0

4.0

2.0

2.0

Tax and others

15.2

10.0

6.3

ConEd ComEd

Ultra large scale

16.0

13.0

RWE

Energy priceyen/kWh
18.0
15.0

13.9

EDF

(Industrial) (ICommercial)

Tax and others

15.8

14.0

TEPCO TEPCO

TXU

10.2
8.1

8.3

PGLE

7.1

6.2

0.0

0.0
TEPCO TEPCO EDF(Industrial) (ICommercial)

Basic priceNote:RWE

PG

Energy priceLE

ConEd ComEd

TXU

Tax and others

TEPCO TEPCO

EDF

RWE

ConEd ComEd

Basic price

Energy priceTax and others

As for consuming magnitude, it is assumed that home use is 30A, middle scale is 150kW, large
scale use is 1,000kW, end ultra large scale use is 4,000kW.

-5-TXU(Industrial) (ICommercial)IEEJ: August 2005

Table 4 The start year of electricity liberalization and change of price

EuropeUSA

Pennsylvania
California
Massachusetts
New York
TexasUKNorway(*2)
SwedenSpain
Germany
Italy
FranceJapan

Initial year of(*1)
liberalization
1997
1998
1998
1998
2001
1990
1991
1992
1994
1998
1999
2000
1995

Price in initialyear
7.99 cent/kWh8.93 cent/kWh9.59 cent/kWh10.63 cent/kWh7.39 cent/kWh7.42 pence/kWh38.9 ole/kWh67.5 euro/MWh
105.9 euro/MWh
125.6 euro/MWh
157.0 euro/MWh
92.8 euro/MWh
22.38 yen/kWh

Price in 2003
7.98 cent/kWh11.62 cent/kWh10.63 cent/kWh12.44 cent/kWh7.50 cent/kWh7.76 pence/kWh54.8 ole/kWh
83.8 euro/MWh
87.2 euro/MWh
126.7 euro/MWh144.9 euro/MWh
89.0 euro/MWh
19.05 yen/kWh

Changingrate▲0.1%+30.2%+10.9%+17.0%+1.5%+4.5%+40.9%+24.1%▲17.7%
+0.9%
▲7.7%
▲4.1%
▲14.9%(*1)

The initial year means the year when structural reform regulations were put into effect, such as not
only beginning of retail liberalization and implementation of pilot program.
(*2) Only for Sweden, price in 1997 is used as price in initial year because of data limitations.
(data origin) USA: electric utilities average unit income price by EIA, UK: average credit buying price ofstandard family(annual consumption of 3,300 kWh) by DTI (tax included). Norway: homeand agricultural average unit price (added value tax excluded) by statistics authority, otherEuropean countries: Eurostat data, Japan: general electric company light power
comprehensive unit prices.

Table 5 Status of supply company change in main states of the USAstate
Illinois
Main
Merry land
Massachusetts
New Jersey
New York
Ohio
Pennsylvania
Texas

statusEntry into home sector is not high transfer cost. New entry is centered toComEd’s area.
Standard offer service (SOS) is provided to all consumers. A high change
rate occurs in big consumers.
SOS is provided to a consumer who does not select a new entry. A highchange rate occurs in big consumers.
SOS is provided as a temporary measure. Default service (DS) is provided
as the final guaranteed service. Change rate varies greatly depending on thestatus of wholesale electricity price.
Because of depressed price of the basic electric power service (BGS)
provided from regional distributor, change gate is low lying.
Because of retail incentive policy like Backout Credit and rebate, change
rate is high.
SOS is provided to a consumer who does not select a new entry. Obligationof price depression for home use sector. High change rate is because of anactive aggregation (load concentration) service in local government level.
Based on the lowest market share plan (Market Share Threshold:MST), thecompetition promotion policy like DS is transferred to a new company iscarried out.
Already existing electric company provides power at standard price(price-to-beat) , regulated price, till the share of new entry exceed 40%.

-6-IEEJ: August 2005

Figure 2 Changing rate trend of power delivery at PECO company in Pennsylvania USA
70%
60%
About 250 thousands ofhome consumers weretransferred to the New
Power co. by CDS.

MST was introduced
to small businessconsumer
MST wasdecay of Enlon
introduced tohome consumer

50%
40%
30%

home usebusiness use
industry use
total

20%
10%
0%
99/04

00/04

01/04

02/04

03/04

04/04

05/04

(Note)MST (Market Share Threshold Program): 20% of consumers who did not change supplier wererandomly selected, then Default Service supplier was decided by bid. PECO Energy’s businessreform plan of 1998 said that if the supplier change rate of home and small business consumers
did not reach 50% by January 1 2003, the supplier for the consumers should be changed by bid.
This open bid was carried out based on the provision.
(data origin) Pennsylvania Office of Consumer Advocate, “Pennsylvania Electric Shopping Statistics”

Table 6 Comparison of reliability rules
USAEurope
Establishing Organization
Name of Regulation
Member
System Operation Rule
Ordinary system operation rule
Emergency system operation rule
Transfer System Equipment Planning
Demand prospecting method
Criteria for equipment ensuring
Wide-area adjustment ofequipments formation
Wide-area Trading Method
Calculation Method for Deliverable
Capacity
Information Communication
Training of System Operator
Tree Management
Publication of Informationreference> Legal Framework ofStable Power Supply

NERC

UCTE

Reliability
Standards
Local Reliability
AssociationOperation
Handbook
Power Transfer
Company

○
○
○
○
○
○
○

○
○
○

○
○

○
○

○
○
○
○
Not clear, thefunction oftransfer sector
became various
and complicated

○
○

Japan
Power System
Utilization AssociationAssociation rule
General Utility,
Wholesale Generator,
PPS, Neutral
○
○
○

○○
Responsibility ofelectricity transfer
company byUtility Law○○○
Responsibility ofgeneral electricity
company by Utility Law(data origin) The above is quoted from the web site of NERC, UCTE and ESCJ.

-7-IEEJ: August 2005

Legal separation

Licenseregulation

General supply
duty regulation

Energy IndustryRegulation (alsotransmission
sector isliberalized)

Table 7 Expected framework assumed overall leberalization
Duty of stable
Final guarantee
Remarks
supplyTransmission
Assigned retail
Framework is established separatingcompany
supply company orstable supply and final guarantee. It ispower transmissiondifficult to put duty on stable supply tocompany
other sector. (ex. Most of Europeancountries)
Assigned Retail
Legal separation is unnecessary
Transmission
because license is provided on theLicence holder and License holder
outer-shape criteria. It is possible to put
other License
duty on stable supply to the other sector
holderthan Transmission License holder. (ex.
UK)
Existing electric
Existing electric
Similar to the present system, general
power utility
power utility
electric power utility widely has the dutyand final guarantee on stable supply.
(form of maintaining present legal
framework, overall liberalization iscarried out.)
Assigned existingWith no regulation on transmission(assured byelectric power utility
price, management is done by industry
industry’s
voluntary rule. Only the framework ofvoluntary rule)energy company remains. (ex.
Germany)
contact: report@tky.ieej.or.jp-8-