Silviase/jgov_v1.4_full_ann huggingface dataset:
## (2) Specified supply projects

“Specified electricity suppliers” are non-general electric utilities which are allowed to retail electricity directly to end users within a designated area while taking the form of in-plant power producers. A MITI ordinance shows patterns of such electricity supplies to end users as follows:

1) Electricity supply by municipal organizations to other municipal departments of their own.

2) Electricity supply to those who have close relations through investment, etc.

3) Reciprocal electricity supplies among those who are closely related in production processes, like inter-company supplies among those composing of an industrial complex.

4) Electricity supply to company housing.

5) Electricity supply by the owner of a building to meet demand within the given building.

As of late March 1994 specified supply projects numbered 1,307, under which 34.9 TWh was supplied with 5.8 GW of licensed generating capacity. These figures represent a mere 4.9% and 3.0%, respectively, to the portion covered by the electric utility industry. Also, supply capacity per project is as limited as 4.3 MW. Nonetheless, now that highly energy-efficient co-generation has been employed as their supply technology these years, these projects attract growing attention from the aspect of the national economy.

While four major sources of electricity supply are described above, the electricity supply system in recent years is also called the “composite electricity supply system.” The system consists of 1) general electric utilities obliged to offer comprehensive supply services, 2) wholesale electric utilities, 3) in-house power producers, and 4) “specified supply projects.” Changing regulations currently underway are unlikely to open the door of general electric utilities, but the entry of independent power producers (IPPs) into the wholesale market, expansion of specified supply projects, etc. are taken into the field of vision.

### 1.2 Regulations of Electric Utility Industry

#### 1.2.1 Grounds for Regulation

The reasons why behaviors of electric utilities are restricted by regulation can be interpreted as follows:

1) Inherent monopolistic nature of the electric utility industry

2) The essential and public nature peculiar to electricity as goods

3) High risks of the project which involves huge investment

4) National security

5) Safety problems

These concepts have been taken over to the existing “Electric Utility Industry Law.”
As a result, from the aspects of effective utilization of resources and security of stable supply, 1) regulations of entry and 2) regulations of exit are provided based on the supply/demand balance principle. Also, 3) rate-making regulations (supply conditions) are provided in order to avoid the demerits of monopoly, and 4) safety regulations are specified as social regulations, among other things.

#### 1.2.2 Electric Utility Industry Law

## (1) Objectives

The Electric Utility Industry Law (1964) provides grounds for official regulations of the electric utility industry (Figure 2). It was an amended version of the Electric Utility Industry Law (1911) to help reorganize the electric utility industry after World War II, while reviving the regulatory ideas of 1) operations and 2) safety of the previous law. Objectives of the amended law are 1) protection of electricity consumers, 2) sound development of the electric utility industry, 3) security of safety, and 4) pollution abatement (Article 1).

## (2) Entry-related regulations

Article 3 describes words entry-related regulations first. It provides that electric utility operations requires a license issued by the Minister for International Trade and Industry. Criteria employed by the MITI Minister in issuing the license are as follows (Article 5):

1) The start of operations meets demand.

2) In the case of a general electric utility, its supply capacity meets demand.

3) If a general electric utility plans to start operations, the supply capacity should not represent double or excessive investments within its service area.

4) The operator should have accounting/technical capabilities in carrying out the operations.

5) The plan for operation should be firm.

6) The operations should contribute to public interests.

In fact, general electric utilities have managed their business operations in the form of regional monopolies. But, it is not because the law specifies a franchise by a utility in an area, but because the system resulting from the “supply/demand balancing clauses” shown in 2) and 3) above, combined with the postwar reorganization of the electric utility industry, and have made it practically hard for newcomers to become general electric utilities. However, in Article 21, the Anti-Monopoly Law cites railway, electric and gas utility services as business operations which tend toward natural monopolistic behavior, from which provisions of the Anti-Monopoly Law are made clear.

Criteria to permit the entry into the wholesale market are pursuant to 4), 5) and 6)
above. After all, those who hope to enter the market are required to obtain a license issued by the MITI Minister.

In addition, “specified supply” projects exist in the service area of general electric utilities, and are engaged in retailing to limited customers. Each specified supply project is required to obtain a license from the MITI Minister, and the primary qualification is that the entry won’t harm the interests of general customers supplied by general electric utilities (Article 17).

## (3) Leave-related regulations

Just like the entry into markets, leaving needs an approval of the MITI Minister (Article 14). The leave can be approved on condition that there is no fear of hurting public interests.

## (4) Supply obligation

In return for virtually guaranteed regional monopoly, general electric utilities are imposed a supply obligation to prevent monopolistic demerits. Namely, they “are not allowed to refuse electricity supply to meet general demand in their service area without justification (Article 18).” In addition, standards for rate calculation as well as rate levels are subject to regulations.

## (5) Rate-making regulations

Electricity rating too is a matter subject to the MITI Minister’s approval. Rate-making and supply conditions for general electric utilities are provided by Article 19 of the Electric Utility Industry Law, and those for wholesale electric utilities, by Article 22.

Article 19 provides that “general electric utilities shall lay down supply rules of electricity rates and other supply conditions, which need to be approved by the MITI Minister.” And, there are three principles of rate-making: 1) cost-base method, 2) the principle of fair returns, and 3) the principle of fairness to customers.

On the other hand, rate-making by wholesale electric utilities, though required to recover costs, can be managed more flexibly than in the case of general electric utilities (Article 22). But, the Electric Utility Industry Law provides no rules of rating-making applicable when “any parties” other than electric utilities wholesale to general electric utilities, like a case where an in-house power producer wholesale its surplus generated output to a general electric utility.

## (6) Other regulations

Beside the regulations of entry/exit and rate-making outlined above, the Electric Utility Industry Law contains side-business regulations (Article 12), broad-area operation (Article 28), accounting/financial rules (Articles 35-40), safety regulations (Articles 41-47), public
utility privileges (Articles 58-65), etc.

## (7) Regulatory authorities

The government office responsible for regulating the electric utility industry is the Public Utilities Dept. of the Agency of Natural Resources and Energy. Meanwhile, in drawing up important policies of the electric utility industry, key roles are played by 1) Electricity Utility Industry Council and 2) Advisory Committee for Energy, the both in the capacity of advisory bodies to the MITI Minister.

### 1.3 Electricity Supply and Demand

#### 1.3.1 Electricity Demand

## (1) Historical trends of electricity demand

In Japan electricity demand has been growing year by year, despite three exceptional declines in the past (Figure 3). It was during the two oil crises (1974 and 1980) and the strong yen recession in 1986 that when the demand abated.

Real GNP elasticity of electricity demand has been larger than 1, and averaged 1.26 between 1965 and 1979. Though having slowed down in the first half of the 1980s after the second oil crisis, elasticity has continued to grow at a faster rate than GNP since 1987 (staying at 1.16 in 1987-93).

Energy demand overall has slowed down since the first oil crisis, but electricity demand alone has remained relatively strong. It reflects the factors below.

In the industrial sector, 1) growing high-tech industries, like semiconductors, have offset falling electricity demand from sluggish material-producing industries; 2) advancing factory automation (FA) at individual factories, above all, automation/rationalization investments to streamline domestic production made after the yen started rising in the mid 1980s, resulted in additional electricity consumption; and 3) an increasing number of more functional air conditioners has been introduced to improve the environment of employees.

Major contributors in the residential sector are 1) the number of households kept constantly growing at 1.3%/year; 2) possession of more than two refrigerators, TVs and other electric appliances each; 3) larger/more functional electric appliances; and 4) appliances run for longer hours by those who put them on while doing other things or by midnight users.

In the commercial sector, 1) expanding commercial floor areas of office buildings, etc. which reflect the advancing inclination of the economy toward services, 2) spread of computers and air conditioners in part due to office automation, 3) extended business hours, including 24-hour shops, and 4) greater use of lighting as decoration in such forms as lighting-up and illumination, among other things, can be cited as principal contributors to the growing electricity demand.

In 1993, residential and commercial uses held 29% and 19%, each, of the total
electricity amount sold by electric utilities. When combined, they were responsible for about half of the total, up around 10 points compared to a decade ago (Figure 4).

## (2) Sharply rising ratio of in-house power generation

In 1993 in-house power generation/consumption amounted to 95.5 TWh, and accounted for 11.9% of total electricity demand in that year (Figure 5). The ratio has been on the constant rise since 1983. The ratio of in-house power generation is even higher among large industrial consumers, up from 19.6% in 1982 to 26.6% in 1993.

Major industries with high in-house power generation ratios are petrochemicals at 71% (in 1993, hereinafter the same), chemical fibers 68%, paper/pulp 68%, and petroleum products 65%. These industries all have manufacturing processes which require steam in large quantities. The in-house power generation ratio among BF-based steel makers remains at 43%, because many of them have joint-ventured thermal power plants invested jointly with electric utilities. Cement makers, which had once depended on purchased electricity from electric utilities to cover almost the whole of their electricity needs, increased the in-house power generation ratio to 45% by now.

Factors behind the rising ratio are: 1) growing electricity production as a result of diminishing steam needs in manufacturing processes, 2) installed process to produce electricity from recovered exhaust heat, and 3) improved economics of in-house power generation, thanks to sluggish international energy prices and lowered primary energy prices by the strong yen.

## (3) Worsening load factor

It is noted that growing residential/commercial electricity demand is paired with a worsening load factor. Air-conditioning uses, namely, space cooling and heating, which occupy a massive portion of residential/commercial demand, do not represent a constant daily or yearly load.

Above all, the surging peak power in summer during the past few years has caused electric utilities to face difficulties in securing enough supply capacity to meet the demand. Spiraling peaks can be attributed to a growing number of air conditioners in use these years, which results in increased space-cooling demand. In the background, there is a pursuit to amenity backed by rising income.

Annual-load factor, on a gradual decline throughout the 1970s and the 1980s, fell below 60% (nine-utility average) by the mid 1980s. Amid the oppressive heat in 1992, it stood at 56% (Figure 6).

It is projected by many forecasts that electricity is likely to keep growing ahead more constantly than other energy sources. Social trends, like information orientation, aging, and many working women in the society, as well as enhanced inclination toward safety, amenity and cleanliness, all point to electricity as the preferred choice. Then, without any measures
taken, the load factor could further drop due to growing share of residential/commercial uses of which the load factor features sharp fluctuations.

#### 1.3.2 Supply Structure

## (1) Power resources mix

Japan’s electricity supply structure has been “hydro supplemented by thermal” up to the 1950s, which reversed to “thermal supplemented by hydro” in 1962, when thermal power generation outstripped hydro. Moreover, it was oil thermal power that played a key role there. Oil thermal power met the needs of the high growth period of the 1960s when the economy and electricity demand both rapidly expanded. Namely, oil-fired thermal power plants, characterized by 1) a short lead time to construction, 2) cheapness, 3) large capacity to be built if necessary, matched the needs of the era.

In 1973 the nine electric utilities depended on oil thermal power generation as much as 67% in generating capacity, and 74% in generated output. At that time, nuclear held a scant 2%-short of generated output, and coal thermal power produced by burning indigenous coal did only 6%. Natural gas (LNG) thermal power was negligible.

But, after being hit by oil crises twice, “oil-less” moves have rapidly unfolded. With the oil crises as a turning point, the policy authorities guided electric utilities to shift to non-oil power resources, while oil thermal power concurrently became economically expensive. As a result, power resources have rapidly diversified to include nuclear, natural gas and coal, and other forms. In 1993, the weight of oil thermal power was a mere 19% in generated output (nine utilities). And, shares of nuclear, LNG and coal thermal power have expanded to 34%, 29% and 8%, respectively (Figures 7,8). All general electric utilities except Okinawa Electric Power have nuclear power plants.

## (2) Characteristics of power resources development

While electricity demand keeps growing, it is becoming harder to secure power resources to bolster supply capacity.

The security of additional electricity supply capacity is not always favorably under way, in part due to the PA (public acceptance) issue, and of nuclear power generation above all. Local residents are showing a more vehement rejection than ever against any plans to build general industrial facilities, including power plants, in their backyard.

This is reflected in the recent trend that power plants are being built in increasingly remote sites from consuming area. This requires massive transmission networks from power plants to consuming areas. Installation of these networks is actually under way, and power plant construction involves a longer lead time (Figures 9, 10). Above all, these are true of nuclear and coal thermal power, which are large-size power resources. It is because 1) appropriate sites are absent near urban areas where consumers are present, and 2) those who live in urban areas defy any attempts to locate generating facilities in their neighborhood,
among others.

Here revealed is a composition of power resources development which features consuming areas concentrating in metropolitan cities and supply sources located in sparsely-populated remote areas, and are connected with massive transmission networks. These trends of power resources development have brought about growing costs in securing an supply capacity.

In addition, electric utilities having big cities in their service areas are facing difficulties in finding sites for new power plants in their own service areas. As a result, they have no choice but to employ “board-area operation” under reciprocal cooperation in such forms as 1) power resources development overriding conventional service areas, and 2) electricity sharing with other electric utilities.

Meanwhile, a spiraling peak urges possession of generating facilities, which run as briefly as a few hours a year at longest. Due to a characteristic inherent to electricity -- it cannot be stored-- it becomes necessary to build as much capacity as required to meet a surging peak. Spiraling peaks worsen the utilization factor of overall capacity, consequently pushing electricity rates up.

Given these rate increase pressures, measures need to be taken on both demand and supply sides. Demand-side measures under way include a campaign for electricity conservation and load management by varying rates. Apart from the broad-area operations already mentioned, supply-side measures include purchasing of surplus output from in-house power plants and elastic expansion of specified supply projects.

## (3) Equipment investment and financial structure

The Japanese electric utility industry invests ¥5 trillion a year in equipment. The net worth ratio (retained profit, capital increase, etc.) has dropped from 80% in the late 1980s to 65% in the last few years. In short, the industry is as debt-prone as raising 30-40% of investment funds from corporate bonds/borrowings.

Due to such huge equipment investments, the outstanding balance of corporate bonds and long-term borrowings (outstanding fixed liabilities) has swollen to ¥25 trillion by late March 1994. Also, the net worth ratio to gross asset is 15% (total capital/liabilities + capital), much lower than the average of whole industries and/or manufacturing at 30-40%.

It attributable to 1) the industry had no choice but to make larger equipment investment than the funds on hand; 2) investment itself features a long period of conception; and 3) heavy weight is constantly held by construction in progress.

Expansion of these equipment investments also causes changes in the cost structure of rating. In short, capital costs are on the rise in the form of growing depreciation costs, interest paid and repair costs resulting from equipment investment. In FY 1993 the share of capital costs (total of the three items aforementioned) in rating costs was 42%, the largest among all the expenses (Figure 11). Conversely, thanks to the rising yen and increasing
nuclear share in recent years, the weight of fuel costs has been on the gradual decline, reaching a low 13% in FY 1993.

### 2. Industry’s Subjects for the Present (Needs for Deregulation)

### 2.1 Pressures of Deregulation

Entering the 1990s, requests for deregulation of the Japanese electric utility industry have rapidly increased. The reasons can roughly be summarized in three points (Figure 12).

First, there are urgent needs for efficient electricity supply and resultant rate cuts. The move was triggered by the recession since 1991 and the rising yen's value since 1993, which worsened the recession. For manufacturing industries, the recession at home helped intensify competition in the domestic market, and the strong yen deprived them of their price competitiveness on the international market. To restore competitiveness in markets at home and abroad, individual firms are striving for cost reduction and restructuring.

However, they have concurrently recognized that there were problems that could not be overcome through company inside efforts alone to improve their efficiency. A typical problem is big differentials between the products supplied by certain industries shipping only to domestic market and their overseas counterparts. Electricity is among them. In this way, differentials between domestic and overseas electricity rates are questioned by growing voices from industry, particularly manufacturing.

The second problem involves both supply and demand of electricity. As already mentioned, demand expansion centers on residential/commercial uses in urban areas. This type of demand features a sharply fluctuating load on not only a daily but seasonal basis. On the other hand, supply-side measures have centered, for years, on the development of large-size power resources. Unfortunately, such power resources require a longer lead time from planning to commission, and power plant sites are located more and more remote from demand. Hence, rising costs appear inevitable in the years to come.

However, technologies of electricity supply from other than big-power resources have already been commercialized. They are decentralized power sources represented by cogeneration. Effective utilization of existing in-house power generation is also under consideration. Though not large in size, these can be located near specific consuming areas and attract attention as generating forms which can contribute to effective energy use.

These two points form direct factors to prompt deregulation of the electric utility industry. Apart from them, the third reason for deregulation can be expressed as “winds of deregulation.” These same winds are blowing worldwide. They are winds to call for the reform of economic structure naturally resulting from maturity of the Japanese economy. To attain economic structural reforms, conventional industrial policies need to be changed to better match the times. The change of regulations has been increasingly requested as a viable step toward the goal. The request is not limited to the electric utility industry, but