Silviase/jgov_v1.4_full_ann huggingface dataset:
market control by buyers, namely general electric utilities, the promotion of “wheeling” is planned as well. In other words, transmission networks owned by general electric utilities will be opened to new market players so that they can reach potential buyers in a broader area, instead of the sole one electric utility that takes charge of the area where they are located.

As for wheeling fees to be paid by the new players, applied for the present will be a corresponding fee will be applied for transfer supply (relaying) currently employed among general electric utilities. The fee is based on average transmission costs (book cost basis). It is employed on the assumption that, given that power resources of new players are smaller than those developed by electric utilities, little additional cost would be required to build up transmission facilities. Separate accounting is made if a bidder is so large as to require buildups of specific transmission facilities.

Wheeling for retailers is not counted under the wheeling issue, which is discussed in the form of opening of transmission networks.

### 4.2 Retailing by Non-Electric utilities

Regulatory changes under consideration widen the possibility for non-electric utilities to sell electricity directly to consumers. Conventionally “specified supply” has been treated as an exceptional form of in-house power generation. But, the drafted amendment to the Electric Utility Industry Law defines it as “specified electric utility project (SEUP),” thus positioning it as one form of electric utility.

SEUP, though in operation within a limited area, supplies electricity directly to so many and unspecified consumers that it should have high public interests. Therefore, from the standpoint of consumer protection, SEUP operators need to obtain a license similar to one currently acquired by general electric utilities. And, licensing involves “supply/demand balancing principles” similar to those applied to general electric utilities.

Also, SEUP is obliged to keep supplying to its customers within the specified area. Accordingly, the general electric utility responsible for the area where SEUP is located is exempted from the obligation to supply to the SEUP customers, though it is required to back up SEUP when necessary.

SEUP rates and supply conditions are subject, not to official approvals, but to notification alone. The grounds for the judgment are that, given SEUP customers are much more limited than those of general electric utilities, demand and cost fluctuations are likely to remain small, and the customers on their part are given, at the initial stage of contract, the right to select their supplier (a SEUP operator or a general electric utility).

### 4.3 Revision of Electricity Rate-Making System

The first conclusion drawn from the review on rating system-related regulations was that the total cost based method would be abided by as in the past, and that price cap system will not be introduced.
Certainly, the Rate-Making System Committee of the Electric Utility Industry Council in its interim report (Jan. 1995) conceded merits of the price cap system, citing that 1) introduction of productivity improvement rate (X factor) could prompt efforts to improve management efficiency, 2) freedom in rate-making could be augmented, and 3) regulatory procedures could be simplified.

But, the committee concluded that the introduction of the price-cap system into the Japanese electric utility industry would be problematic, especially regarding the following points. Namely, the committee asserted that 1) the price cap system would leave fears for raising necessary equipment investment funds for the security of a stable supply, 2) there is a strong social request for a cost-based equal and fair pricing system, without leaving the matter to operators' arbitrary rate-making by type of contract, 3) due to the strong nature of regional monopoly, direct price competitions among operators should not always lead to customers' advantage, and 4) a society-wide consensus could hardly be built on the productivity improvement rate (X factor) that is not yet objectively well-grounded.

Therefore, the interim report concluded that “a future rate-making system must be designed, while 1) maintaining the basic framework of the total cost-based method with which rates are set based on actual costs, and 2) introducing a mechanism (incentive regulation) of the rate-making system which could prompt electric utilities’ voluntary efforts to improve efficiency, to reflect the merits of a price-cap-like simplified rules.”

## (2) Introduction of incentive regulation

The second feature is to adopt yardstick competition institutionally as an incentive regulation to prompt improvement of management efficiency. The following are proposed as procedures of the adoption. 1) When revising their rates, electric utilities must disclose beforehand to what extent their management efficiency is improved, and apply new rates based on the improved-efficiency-integrated cost.

2) The government examines and assesses the application with the method of (a) or (b) below, then encourages electric utilities' management efforts through resultant assessment. (a) To compare costs and management indicators of individual utilities. (b) Standard values set uniformly among individual utilities.

In Japan, similar incentive regulations have been in practice in the public transportation sector, including bus services.

## (3) Fuel cost adjustment system/periodical assessment

Apart from the proposals in the preceding section, the Rate-Making System Committee of the Electric Utility Industry Council also proposed in its report to introduce 1) a fuel cost adjustment system and 2) a periodical assessment of rates.

The fuel cost adjustment system is designed to enable a prompt response to cost fluctuations resulting from fluctuations in exchange rates and crude oil prices which are
beyond corporate management efforts. The periodical assessment of rates is designed to assess rates, independent of rate revisions, and to learn the state of balance and outcome of on-going corporate efforts to improve management efficiency.

## (4) Rate-making system as a demand-control option

To lower electricity rates, leveling load is an important element. To this end, it is necessary to encourage efficient use among customers by broadening the range consumer of choice in the form of more diversified/elastic rate-making.

To establish rate-making which can meet the objective, the present “approval” system will be changed into a “notification” system. The latter, once in practice, enables electric utilities to offer a diverse rates menu flexibly, and helps prepare the grounds for free consumer choice on customers side. Also, in an effort to reduce summertime peak loads, it is considering, to 1) introduce a rate-making system to alleviate the burden of cost to purchase heat-accumulator-type air-conditioners, and 2) expand application of time-of-use rating.

### 4.4 Safety Regulations

The request to streamline safety regulations was judged unsuitable in reference to both overseas safety regulations currently enforced and present technical levels. The Subcommittee on Electricity Safety Problems of the Supply and Demand Committee, EUIC, which has discussed rationalization of safety regulations, stressed the following viewpoints in its interim report (June 1994).

1) Importance of the principle of self-accountability and transparency of regulatory contents

2) Even after rationalized based on technical advance, safety records, etc., safety levels be maintained/improved.

3) Corporate activities be stimulated and benefits to the public be improved as a result of eased time and economic burdens.

4) Voluntary safety system be upgraded as a result of higher consciousness of safety in the private sector.

5) Rationalization be advanced in conformity with Japan’s actual situation, while referring to overseas safety regulations.

6) Safety system be constructed in a manner to meet future needs too.

Based on the examination results of the subcommittee, future safety regulations are amended in the direction below.

The most vital change in the regulations is the change in the basic stance to trim the scope of direct government involvement. In regard to electric utility facilities smaller than the prescribed size, for instance, it is proposed to 1) simplify the scope of construction plans subject to “approval” and “notification,” 2) reduce the scope subject to inspection before
commercial operation, 3) leave periodical equipment inspection to operators' voluntary checks, and considerably extend an interval between checks, and 4) remove the procedure to approve welding methods beforehand to be given during welding checks. However, instead of no detailed safety regulations to be offered by the government, 5) relevant authorities will be allowed to make elastic/mobile operations of on-the-spot inspections.

Along with these, an institution will be arranged to prompt voluntary safety efforts. In specific terms, there is a move to simplify the way of involvement of licensed chief electrical engineers, depending on technical levels of electrical structures (generators, etc.) Among others, simplification of technical standards and review on categories of electrical structures is underway.

### 5. Effects of Deregulation

To what extent is deregulation of the electric utility industry is expected to have effects on the national economy? In order to measure the effects in terms of domestic production value, consumer's surplus, etc., calculations were made as described below. Models in use are an inter-industry input-output table and a macroeconomic model.

### 5.1 Effect Estimation Method and Assumptions

Assumptions and calculation processes taken in estimating the effect are as follows (Figure 17). First, it was assumed that deregulation would help the electric utility industry improve productivity and load factor, and electricity rates would be lowered by 10% from their levels. Above all, because it is estimated that a 1% higher load factor can reduce the cost by 1%, there are high hopes for implementation of deregulation to open a road to flexible rate-making, which can promote load factor improvement.

Lower electricity rates, if realized, can reduce manufacturing costs in industries other than the electric utility industry, to bring the price of goods prices down. To what extent the price of goods of individual industries goes down can be analyzed using the inter-industry input-output table.

Effects of falling prices of goods on the national economy can be examined by dividing them into 1) price effect and 2) income effect. With price effect, a given product is priced cheaper, which results in greater demand for the product, and ultimately expands domestic production of the product. On the other hand, with income effect, falling prices of various goods increase consumers' purchasing power in real terms, thus expanding real consumption expenditure and investment.

1) Price effect depends on price elasticity of demand for individual goods. Price elasticity of individual goods is estimated based on the input-output table. While growing domestic demand is naturally expected to expand imports, it is assumed here that the whole of incremental demand would be met by greater domestic production.
2) Income effect means an incremental income brought about by a gap between GNP resulting when electricity prices remain unchanged, and GNP resulting when general commodity prices declines thanks to lower electricity prices. Here it is calculated in terms of the domestic production value brought about by greater income.

Estimation of income effect starts by studying effects of falling prices of individual goods on the consumer price index (CPI) and wholesale price index (WPI). Subsequently, because interest rates are also affected by commodity prices, official rates are also estimated as a reaction function to commodity prices. With the CPI, WPI and the range of official rate cuts given as exogenous variables of the macro economic model, changing levels of GNP are measured. By assigning the outcome to individual final consuming sectors in the inter-industry table, an incremental portion of domestic production value can be estimated.

The effect is estimated primarily for the section of the year 2000, and by comparing the business as usual case (BAU) with a case where deregulation leads to falling electricity prices. The rate of fall in electricity prices is assumed at 10%.

### 5.2 Commodity prices and welfare

## (1) Effect on commodity price levels

A 10% fall in electricity rates leads to a 0.67% drop in manufacturing cost of non-electric industries on simple average (Figure 18). Excluding the electric utility industry, industries (goods) expected to record massive drops are iron at 1.10 and steel products at 0.71, followed by petrochemical at 0.67% and paper/pulp at 0.57%.

When measured in terms of CPI, which is weighted by goods-by-goods expenditures of private final consumption, these suggest a 0.33% fall in CPI. They lead to a 0.30% in WPI as well.

## (2) Effect on domestic production value

Due to falling prices of individual goods described above, demand for individual goods grows in proportion to price elasticity. If the whole of the incremental demand is met by domestic production, GNP in the year 2000 in the lower electricity price case would be greater by ¥2.8 trillion in terms of all-industry total than in the BAU case. This represents an increase of 0.26%. With the electric utility industry excluded as the self-sector, it is processing/assembly industries, such as electrical machinery, general machinery and transport machinery that are expected to register massive gains in absolute terms. Among others, substantial increase rates are likely for material-producing industries, such as paper/pulp, cement, steel and nonferrous metals.

## (3) Welfare - Consumer’s surplus

In the BAU case, the inter-industry input-output table puts nationwide electricity consumption expenditures in the year 2000 at an estimated ¥20.6 trillion (in 1985 prices).
Then, assuming that price elasticity of electricity demand is -0.45, the falling electricity price would increase nationwide welfare by ¥46 billion. The figure includes an incremental surplus recorded by firms as electricity consumers. Targeting household budget alone, electricity consumption expenditures in the household budget would total ¥4.3 trillion in 2000, which means an incremental surplus of ¥9.6 billion resulting from falling electricity prices. This represents 0.3% of electricity consumption expenditures in the household budget.

Meanwhile, measured in 1990 nominal values, an increase in nationwide welfare amounts to ¥29 billion, and that in the household budget to ¥6 billion.

### 5.3 Effect on Income

## (1) Effect on national income

A 10% fall in electricity price pushes the CPI and WPI down by 0.33% and 0.30%, respectively. Assuming that interest rate is a reaction function to commodity price levels, taking past interrelations between the two, the elasticity is estimated at around 0.5. With the falls in these three variables incorporated in the macroeconomics model, its simulation results show that GNP in 2000 could expand by 920 billion, up 0.2% over that in BAU case. (However, because falls in the three variables are incorporated from 1996 and on, the pace of expansion would be around 0.04% a year.)

Among GNP components, it is private equipment investment that grows highest, followed by private final consumption. Compared with the BAU case, they would be larger by ¥570 billion and ¥227 billion, each, in 2000.

## (2) Effect on domestic production value

Substituting relevant final demand items in the input-output table for the changes by GNP component above, domestic production would outstrip the BAU case by around ¥1.6 trillion, or up 0.18%. Industries recording massive gains are electrical machinery at ¥250 billion and construction at ¥230 billion, among others. Meanwhile, those showing high growth rates are machinery-related industries represented by general machinery, and material-producing industries like cement and steel.

### 5.4 Price Effect and Income Effect

When combined, the price and income effects discussed above would expand domestic production in 2000 by ¥4.4 trillion, or 0.41%, over the BAU case. By industry, machinery-related industries, such as electrical and general machinery, show massive gains in their domestic production in absolute terms. In growth terms, considerable effects are produced on material-producing industries, including nonferrous metals, paper/pulp, steel products, and chemicals and cement, in addition to the machinery industries (Figure 19).
### 6. Subjects of Deregulation

Given the deregulation under way, this section examines what are its effects, and what sorts of subjects still remain.

### 6.1 Market structure

As a result of the latest deregulation, the electric utility industry's system is likely to change as follows.

First, participation of new players in the electricity wholesale market would help improve efficiency in the generating sector. Though it is hard to forecast to what extent new players will participate in the market, some put their generating capacity commissioned from 2000 and on at 1 GW, and others at 2 GW. Even if the capacity turns out to be limited, it would be lower than the avoidable costs of electric utilities, which is very significant in the sense that it could make marginal costs in the generating sector transparent.

In cost terms, their direct effect on overall cost reduction would be limited, because these new participants represent an extremely marginal supply capacity. But, even indirectly, their presence could stimulate cost reduction by the electric utilities.

Second, the bidding system proposed by the government indicates that the system fails to put the market to best use. If new players have highly reliable supply capacity, there is no necessity to exclude specific power resources from qualified bidders. While the bidding under the latest deregulation appears to imagine power sources for peak load as bidders, it won't be unreasonable in the future to include base-load power sources among qualified bidders. From such a viewpoint, it will no longer be necessary to leave large-size power resources development, like nuclear and LNG, only to electric utilities alone. It could just leave to the market.

An advanced shape of such an idea is an encircling bidding system. Qualified bidders could range from a general electric utility responsible for other service areas which have surplus supply capacity, a wholesale power producer, and IPP, to the electric utility which calls for the bid itself. The change under the latest deregulation fails to take such an idea in to account. But, depending on new players' performance and external pressures, there can be mounting requests for further deregulation to realize such a drastic system.

Third, there remains the issue of how much should be charged for the use of transmission lines by new players. With the revision made this time, it was decided to charge a fee corresponding to that set for transfer supply among electric utilities. This after all assumes that supply capacity of new players won't be so large. Once their supply capacity expands eventually, electric utilities couldn't be so generous.

Also, in regard to charges resulting from construction of additional transmission networks, it will become necessary to put the issue into public debate, and specify it at the time of bidding.
Fourth, to further improve efficiency of opening of transmission lines/wheeling system mentioned above, relevant regulations and systems need to be changed or reviewed. The latest deregulation provides no measures to help improve efficiency of the operation of network functions of transmission lines. Therefore, even if new players are allowed to use wheeling in their wholesale electricity supply, it won't facilitate an optimal supply/demand balance backed by transmission networks.

Any efforts to realize this should reach the use of the power pool market, as demonstrated by Britain where the transmission sector was integrated into the National Grid.

### 6.2 Desirable Method of Rate-making

Revised rate-making regulations enabled electric utilities to introduce elastic rate-making, which can contribute to leveling load. For consumers too, it can be highly valued for a widened possibility of choice from a diverse rating menu. Also, thanks to the introduction of incentive regulations, management efficiency can be improved more than ever. However, many subjects still remain to be pursued.

First, due to the supply cost method and FDC system being preserved intact, regulatory costs can grow. Second, there can be a distortion of resources distribution efficiency. The price-cap system, of which introduction was recently dropped, provides a viable measure to deal with these problems.

Theoretically, a cap properly set could prompt convergence to the Ramsey pricing system. Also, with a well-designed X factor of the price cap, it becomes possible to take investment into consideration from a long-range viewpoint. The price cap system can be counted as the only one rate-making system that can conform to the policy to introduce competition through deregulation.

In terms of regulatory cost-reduction, the recent changes in regulation this time could produce few favorable effects.

### 6.3 Problems of External Effect

Deregulation is expected to enhance efficiency by making the electricity market more competitive. To promote it further, additional changes in regulation will be required as already mentioned.

But, it should be recognized that deregulation is also accompanied by problems of external poor economy. First, there is a problem of “cream skimming”. Environmental problems, and technological development are other important problems. While advancing deregulation, these problems all represent matters which require new regulations to prevent evils from arising in the form of market failure. Though not referred to in this report, it is an important subject in considering equity and fairness, as well as a stable electric utility industry’s system in the long run.