Silviase/jgov_v1.4_full_ann huggingface dataset:
### 7. Conclusions

### 7.1 Early lessons

It is only five years since the British electricity supply industry was privatised after many years of state ownership and, prior to that, state regulation. It is obvious, therefore, that there has been relatively little time for the effects of privatisation to appear.

Even at this early stage, however, some lessons emerge from this attempt to privatise and liberalise a complex industry within which were previously embedded both naturally monopolistic and potentially competitive activities. The principal lesson is indeed that most of the problems which have appeared are due to the government's failure, at the time of privatisation, to make a clearer separation between these two types of activities and to ensure that in the potentially competitive sectors the privatisation scheme encouraged a competitive process to begin. Regulation of the industry has been much criticised but it is not so much the regulatory regime per se which is at fault. The strains now showing in regulation are symptoms of a more serious underlying problem - that because of the way the industry was privatised, the government has heaped too many problems on the regulator.

### 7.2 Some advantages of the new regime

The new regime has some considerable advantages over the old.

First, government has disengaged and decisions are less politicised (though governments still try to interfere as old habits die hard).

Second, establishment of an independent regulatory office means that a more open system of regulation prevails than under the old secretive regime when Ministers, officials and industry managers took decisions behind closed doors. It is now much less easy to sweep the industry's pricing, investment and other problems under the carpet.

Third, entry to the industry has become possible (if rather difficult) instead of being prohibited by the state as it was under nationalisation. New generators and suppliers of electricity can move into the industry, knowing that they can transmit their electricity through a network not owned by generators and distribute it through networks which, though owned by distributors, should not discriminate against them. Consequently, product market competition is increasing. As the competitive market has expanded, companies with a choice of supplier have begun to benefit from lower prices. Prices to residential consumers have fallen a little in the recent past (excluding the effect of imposing VAT): they should gain more from 1998 onwards when they can choose supplier.

Fourth, the market for corporate control now operates in electricity. There have already been considerable improvements in productive efficiency, especially in the generators, where labour and fuel costs have been greatly reduced compared with the days of nationalisation. Now that the RECs are also in the market for corporate control more improvements are in prospect.
Fifth, the old protective form of energy policy in Britain, conducted mainly by the support given to nationalised British coal and to nuclear power by the electricity supply industry, could not survive privatisation. Coal protection is now very small (regrettably, the net effect of the new regime may well be some bias against coal) and support for nuclear power is time-limited (to 1996). Electricity privatisation, despite its many flaws, was a significant step along the road to a liberalised energy market.

### 7.3 Deficiencies of the privatisation scheme

There has been considerable entry to generation and competition to supply larger consumers has developed. But the effect on incumbents has been remarkably small and smaller consumers have so far felt few benefits. The main reasons appear to be as follows.

The most important single reason is the failure to establish an initial structure of generation which would transform a potentially competitive sector into one where a competitive process actually flourishes. The duopolistic structure (which has turned into a triopoly as Nuclear Electric has expanded) has had both direct and indirect effects, the latter because of actions taken by the RECs to evade the market power of the incumbent generators. The initial structure of generation has interacted with the pooling system and with the contractual arrangements between entrants and RECs to channel competition away from those areas where it would have had most effect on the incumbents and most impact on prices. Moreover, the task of the regulator has been greatly complicated by the need to regulate generation: not only has regulating generation proved extremely difficult but OFFER's resources have been diverted away from supervising the naturally monopolistic sectors of the industry.

Second, the pooling system which has caused such problems is proving very hard to reform. Imposed markets, which participants are compelled to join, find difficulty in adapting to changing circumstances. Like the pool, they tend to produce complex rules, which are for the benefit of existing participants and which act as a barrier to entering the industry. Adaptation tends to take the form of making the rules even more complicated. Proposals for pool reform have been aired for some time; it appears that agreement was almost reached in 1994 for an arrangement which would have allowed trading outside the pool but in the end the DGES would not accept it. $ ^{57} $ It is not clear that any form of pooling, other than market participants would agree among themselves, needs to be imposed. But to remove an institution which was established by government and which has developed a life of its own is clearly difficult.

Third, outside generation potentially competitive activities and natural monopolies have been left in the same organisations making regulation unnecessarily difficult. NGC, which controls transmission and central despatch and settlements, contains two pumped storage generating
stations. $ ^{58} $ More seriously, each REC owns its local network of wires to which it is supposed to provide non-discriminatory access. But it also engages in a variety of functions in which it competes with others - supply and, depending on the REC, appliance sales and services, contracting and generation - as well as having the ability to diversify into other activities.

Fourth, the initial supply and distribution price cap regimes were unduly favourable to the RECs which have turned out to be much more profitable than had been expected. It was, of course, extremely difficult to predict the effects on profits. But there have been regulatory consequences as OFFER has had the difficult task of trying to adjust the original settlements.

Fifth, one consequence of the weakness of competition in generation and the laxity of the REC price caps has been that shareholders and senior managers throughout the electricity supply industry appear to have been the main beneficiaries of privatisation. Media attention has concentrated on the privatised utilities so that managers' salaries, and to a lesser extent, shareholders' gains have become a topic of public discussion. The public perception of electricity is of an industry where any recent favourable effects on prices have been dwarfed by large benefits to managers and shareholders. Even though gains to residential as well as other consumers should soon appear, there is a danger that demands that the regulator or the government 'does something' will bring a new politicisation and re-regulation of the industry.

### 7.4 Lessons from electricity privatisation in Britain

If one regards the crucial test of a market as the extent to which it stimulates a competitive discovery process, the privatised electricity market still has many deficiencies. It is however, in my view, a considerable improvement on nationalisation, mainly since entry is now possible and has been shown to be feasible and because the companies are now in the market for corporate control. Once all consumers have the power of exit (from April 1998) the development of a genuinely rivalrous market may well be accelerated: not only will suppliers be subject to greater competition, they will put pressure on generators to bring down prices and on the regulator to reduce transmission and distribution charges. Another advantage, in my judgement, is that the new privatised market has capacity to evolve and is capable of being reformed in a way the old regime was not.

I would suggest six lessons that should be learned from electricity privatisation in the United Kingdom.

The first is the importance, at the time of privatisation, of separating natural monopoly activities from potentially competitive activities and regulating only the former. Regulation is such an unsatisfactory business that it should, in my view, be avoided wherever possible: it involves attempts to gather centrally information which is unlikely to be revealed except by market processes.
Regulating sectors which are potentially competitive wastes valuable regulatory resources, is most unlikely to be effective and gives regulation a bad name. The area of genuine 'natural monopoly' needs careful consideration to avoid inclusion of any activities where competition is possible and the market should be allowed to redefine natural monopoly as technological change occurs. Too much emphasis on regulation and too little on competition will delay and reduce the gains to consumers, leading to disillusionment with privatisation and de-regulation.

Second, price cap regulation - despite the problem of determining X factors which I have mentioned and the tendency to move towards rate of return regulation - generally provides better efficiency incentives than does a rate of return regime. The regulator does, however, need to establish a stable framework of regulation which is expected to last for a period of years.

Third, an independent regulatory office has many advantages over direct regulation by government. The system is more open and less susceptible to short-term political pressures.

Fourth, giving the regulator the duty to promote competition provides him or her with a powerful incentive to stimulate rivalry and helps avoid ‘capture’ and the other problems which can afflict regulated systems if regulators are over-influenced by pressure groups.

Fifth, the market for corporate control not only directly increases efficiency pressures, as is generally recognised. In regulated industries, it also provides valuable information for regulators as different management reams vie to control companies, making public their ideas on new and more efficient ways of achieving existing goals. In general, pressures to reorganise industries arising from the market for corporate control should not be resisted unless there are very powerful anti-monopoly reasons.

Sixth, the gains from privatisation and deregulation appear over a period of many years as market entry is stimulated, the market for corporate control operates, and rivalry results in technological and managerial advances, ensuring that benefits are passed on to consumers. Such gains are essentially dynamic: they cannot be captured by calculations of static efficiency benefits which are indeed irrelevant to the case for privatisation and deregulation.
## Table 1

## NATIONAL POWER AND POWERGEN POWER STATIONS AT VESTING DAY

## by type of fuel

National Power	PowerGen
GWso	% of total	GWso	% of total
COAL	19.5	66	11.6	62
COAL/OIL	2.6	9	1.9	10
OIL	5.9	20	4.0	21
GAS TURBINE	1.6	5	1.2	6
HYDRO	0.1	-	0.1	1

TOTAL	29.7	100	18.8	100

Source: CEGB Statistical Yearbook, 1988-89, Table 11B
## Table 2

## GENERATOR MARKET SHARES OF POOLED OUTPUT

per cent

1990/91	1993/94	Oct.1993-Sep.1994
National Power	45.5	35.0	34.2
PowerGen	28.4	26.1	25.3
Nuclear Electric	17.4	23.2	23.3
Inter-connectors and Pumped Storage $ ^{*} $	7.7	8.4	8.8
New entrants	0.0	6.2	7.3
Others $ ^{**} $	1.0	1.1	1.1
TOTAL	100.0	100.0	100.0

* ScottishPower and Hydro-Electric (via the Scottish Inter-connector), EdF (via the French Inter-connector) and NGC Pumped Storage

** Mainly BNFL, AEA and renewables

Source: S.C. Littlechild, 'Competition in Electricity: Retrospect and Prospect', in Regulating Utilities, Institute of Economic Affairs, 1995 (forthcoming)
## Table 3

## Employment in Electricity Generation

Vesting day 1990

end March 1995

National Power 17,200 5,100

PowerGen 9,500 3,700

26,700 8,800

Source: National Power Annual Reviews

PowerGen Report and Accounts,

and Press reports
## CONCLUSIONS

o early to draw conclusions, after just over five years

but most problems seem due to two failures:

to separate naturally monopolistic and potentially competitive activities more clearly

to ensure that in the competitive areas the privatisation scheme encouraged a competitive process to flourish

because of these two failures too many problems have been heaped on the regulator
## ADVANTAGES OF THE NEW REGIME

o government has disengaged so less politicisation

o more open regulation

entry to generation and supply is possible and has occurred

considerable improvements in productive efficiency

prices have begun to fall and should fall further as the competitive supply market extends (April 1998 onwards)

o protection for the energy industries is now much reduced
# DEFICIENCIES OF THE PRIVATISED MARKET

despite considerable entry to generation and supply the impact on incumbents has been small. The two major generators, for example, are still price-makers

the duopolistic structure, the pooling system and contractual arrangements between RECs and new entrants have combined to channel competition away from areas where it would most have affected incumbents in generation

the pooling arrangements are proving hard to reform

outside generation, potentially competitive activities and natural monopolies have been left in the same organisation, making regulation difficult

initial supply and distribution price caps were unduly favourable to the RECs

because of the above deficiencies, shareholders and senior managers have so far been the main beneficiaries of privatisation. A new politicisation of the industry is threatened by demands that regulation should be ‘tightened’
## NECESSARY REFORMS

curb the market power of National Power and PowerGen, by plant divestment or other means

divest the wires businesses of the RECs from the rest and divest generating plant from NGC

regulation would then be confined to natural monopoly networks (so long as they remain genuine ‘natural monopolies’), leaving generation and supply unregulated except for oversight by the general competition authorities
Figure 1. Prices of Fuels Purchased

GB manufacturing

Figure 2. Prices of Electricity Purchased

☐ small + medium ◇ mod. large △ extra large
3. Japan

# REGULATORY REFORM AND ITS EFFECT IN THE JAPANESE ELECTRIC UTILITY INDUSTRY

## Hisao KIBUNE

Department of Economics,

Nagoya-Gakuin University

and

Economic Research Institute,

Economic Planning Agency
## I ntroduction

Following the war, the electric utility industry in Japan was vertically integrated into nine core utilities, each devoted to a system to ensure a stable supply of high-quality electricity. Today, however, this system is undergoing gradual changes amid varying rules and deregulation that call for a more efficient system of the industry. Among the changing regulations under consideration are to liberalize entry into the electricity wholesale market, stimulate wheeling, revise rate-making system, establish direct electricity retailing in the form of specified electric utility industry, and ease safety regulations. The first drastic amendment in thirty years of the Electric Utility Industry Law is already slated.

This report is designed to consider the background and contents of deregulation of the electric utility industry currently underway. Composition of the report is as follows. Present systems of the electric utility industry and applicable regulations are reviewed (Chapter 1), followed by a discussion on why the changes are necessary(Chapter 2). Subsequently, conventional regulations are evaluated from a theoretical aspect (Chapter 3). Thus, the first three chapters deal with the background of deregulation. Then, after summarizing the contents of deregulation under consideration (Chapter 4), that extent that deregulation can produce effects on the national economy is considered (Chapter 5). The final section gives a glimpse of desirable conditions of the electric utility industry and regulation in the future.

### 1. Japan’s Electric Utility Industry

Major electricity suppliers in Japan can be classified into electric utilities and in-house power generators. Electric utilities can further divide into general and wholesale electric utilities. There are ten general electric utilities, each taking the form of monopoly in its service area and carrying out vertical integrated operations of generation, transmission and distribution.

The Electric Utility Industry Law (1964) governs the electric utility industry. The law specifies rules of the entry/exit of the electric utility industry, supply conditions (rate-making), supply obligation, safety, etc.

While electricity demand is expected to continue to grow, general electric utilities have various problems in securing necessary supply capacity.

### 1.1 Systems of Electric Utility Industry

#### 1.1.1 Electric Utilities

## (1) Category of electricity suppliers

Electricity suppliers in Japan consist of 1) electric utilities designed to sell electricity generated by themselves to a third party, and 2) in-house power producers that generate electricity to be consumed by themselves. As of late March 1994, installed generating
capacities amounted to 212.9 GW, including 190.4 GW owned by electric utilities and 22.5 GW by in-house power producers. Thus, electric utilities are responsible for about 90% of electricity supply in Japan (Figure 1).

Electric utilities are further divided into 1) general electric utilities and 2) wholesale electric utilities. General electric utilities, each given a specific service area of its own, are expected to supply electricity to meet general demand in their service area. On the other hand, wholesale electric utilities, without having specific service areas of their own, are designed to provide wholesale electricity to general electric utilities.

## (2) General electric utilities

There are ten general electric utilities. They are Hokkaido Electric Power Co., Inc., Tohoku Electric Power Co., Inc., Tokyo Electric Power Co., Inc., Chubu Electric Power Co., Inc., Hokuriku Electric Power Co., Inc., Kansai Electric Power Co., Inc., Chugoku Electric Power Co., Inc., Shikoku Electric Power Co., Inc., Kyushu Electric Power Co., Inc., and Okinawa Electric Power Co., Inc. (Table 1). Until 1972, when Okinawa was returned by the U.S., the remaining nine had been responsible for the nationwide electricity supply as general electric utilities. This, popularly called the “nine-utility system,” was established in May 1951 as a result of reorganization of the electric utility industry after World War II.

This system has survived to date. Individual electric utilities, privately owned and run, have their own service areas allocated by dividing the whole country land into ten blocks. The utilities are supplying electricity through vertically integrated operations of generation, transmission and distribution.

Tokyo Electric Power, the biggest general electric utility in Japan, is responsible for the Kanto area, with Tokyo as the core. It sold a total of 255 TWh to 24 million customers and earned sales proceeds of ¥4,558 billion (FY 1993). These figures hold around 34% of the ten-utility total in terms of both generated output and proceeds. Tokyo Electric Power is capable of generating 49.5 GW at maximum, the world's second largest after Electricite de France (EdF).

Kansai Electric Power, the second largest after Tokyo Electric Power, covers the whole of Kansai, centering on Osaka. In FY 1993, the utility sold 123.3 TWh to 11.6 million customers and earned ¥2,287 billion. These figures account for around 17% of the ten-utility total. Its generating capacity amounts to 35.0 GW, of which 28% is covered by nuclear power plants. The share of nuclear is highest among Japan's general electric utilities.

Chubu Electric Power covers the Chubu area, with Nagoya as the center. Its customers, electricity sales amount and sales proceeds are 9 million, 102.9 TWh and ¥1,898 billion, respectively, and puts the utility responsible for around 14% of the ten-utility totals.

The top three utilities alone account for 66% of the total electricity amount sold by general electric utilities (FY 1993), and their combined share has been on the rise year by year. Major reasons for the rise are various functions concentrating in urban areas, and
heavier electricity demand by residential/commercial users, as opposed to instead of industrial. In addition, because their supply capacity is in sufficient, the three utilities are becoming increasingly dependent on external supply capacity outside their areas.

## (3) Wholesale electric utilities

Apart from the Electric Power Development Co. (EPDC) and the Japan Atomic Power Co. (JAPC), wholesale electric utilities include twenty joint-ventured thermal power plants and thirty-four municipal electric utilities. EPDC, the largest wholesale electric utility in Japan, was founded in 1952. At the time of its establishment, electricity demand was so strong that nine electric utilities were forced to increase their supply capacity. But, because of financial difficulties, they could hardly meet the need. Therefore, EPDC, funded 99% by the government, was inaugurated as the machinery through which massive national funds were funneled into power resources development projects.

JAPC on its part was established in 1957. Jointly funded by nine electric utilities, EPDC and industry, JAPC was expected to commercialize nuclear power generation by importing commercial-size reactors to generate electricity. Meanwhile, many of the joint-ventured thermal power plants were established during the postwar high-growth period with joint investment between steel makers, industrial users, and electric utilities. In addition, municipal electric utilities, run by municipal governments, have power plants to put local water resources to effective use. They all specialize in hydraulic power generation.

As of March 1994, general electric utilities (10) have 1,352 power plants and 163.5 GW in peak output; wholesale electric utilities have 406 plants and 26.9 GW. When combined, installed generating capacity owned by electric utilities amounts to 190.4 GW at a total of 1,758 plants. Thus, of electric utility totals, general electric utilities hold 77% in plant number, and 85% in generating capacity.

#### 1.1.2 In-house Power Producers

## (1) In-house power generation/consumption

As of March 1994, in-house generating facilities are installed at 2,185 sites and amount to 22.5 GW, responsible for around 10% of Japan's total generating capacity. Major in-house power producers are found in the paper/pulp, chemical, steel and petroleum refining industries. Many are generating electricity as a by-product from the steam production necessary for manufacturing processes, or committing to in-house power generation in order to reuse energy sources generating from their manufacturing processes as by-products. But, enhanced energy conservation spurred by two oil crises helped strengthen in-house generating capability as a measure of energy recovery.

In 1993 in-house power generation covered 28% of electricity needs among industrial users, and the ratio has been kept high after the second oil crisis.