Electricity Cartel Directly Contradicts Power System Reform

in Japanese

Electricity Cartel by Major Power Companies

On 1 December 2022, the Japan Fair Trade Commission (JFTC) issued a surcharge payment order and cease and desist order against Chubu Electric Power Company, its retail subsidiaries, Chugoku Electric Power Company, and Kyushu Electric Power Company on charges of cartel (unfair restriction of trade).¹ This is a case of alleged violation of the Antimonopoly Law, in which these three major electric power companies and Kansai Electric Power are alleged to have agreed not to acquire customers in each other's business areas in the retail business for large consumers. The cartel appears to have been in place since around 2018, and the JFTC has been conducting on-site inspections of the companies since April 2021. In addition to issuing cease and desist orders, the JFTC will impose surcharges totaling more than 100 billion yen.²

It is reported by mass-media that Kansai Electric Power has approached the other three major electric power companies to form a cartel.³ However, since it first voluntarily reported the violation based on the surcharge reduction and exemption system, it is assumed that they will be exempted from administrative punishment. The other three companies will have the opportunity to express their opinions on the proposed punishment, so the punishment has not been officially finalized, and they can still appeal to the court if they are dissatisfied with the charges. Nevertheless, since this is the result of a year-and-a-half-long investigation and is based on a voluntary report, there is a strong possibility that there was some violation of the law. If this is the case, it must be said that this is an extremely serious matter.

The Nature of the Power Cartel Problem

First, this is a violation of the Antimonopoly Law as a cartel, which is a legal issue regardless of the business field. This is extremely serious, as it is a collusion between dominant operators to stifle market competition, which is highly contrary to the interests of consumers. In the areas of these four power companies, there are fears that the cartel has kept electricity prices unreasonably high. This is an unprecedented situation in the electric utility industry, and is also a serious matter in view of the record-high surcharge of over 100 billion yen in total.

Second, it is extremely problematic from a policy perspective because it occurred in the process of electricity liberalization and electricity system reform. The government has been promoting electricity liberalization since 1995, and since 2013, as the previous reforms did not go far enough, electricity system reforms have been promoted as a pillar of its growth strategy. The reforms have been promoted because the old system of regional monopolies was not sufficient to reduce electricity prices, expand consumer choice, or provide a new stable supply in an era of increasingly distributed power sources (Report by the Agency for Natural Resources and Energy's Expert Committee on Electricity System Reform, February 2013). To achieve this, healthy competition with new entrants is essential, but if the newly opened market leaves the old monopolies with an overwhelming advantage, there is no way that competition can adequately occur. It may sound paradoxical, but for the market mechanism to function, it is essential for the government to intervene appropriately in the market and create an environment in which new entrants can compete adequately.

As a researcher and member of the Cabinet Office's Task Force on Renewable Energy Regulations, the author has repeatedly pointed out the inadequacy of competition policy exercised by the Electricity and Gas Market Surveillance Commission (EGC) and the Agency for Natural Resources and Energy. While there are some commendable aspects, such as the efforts of the EGC to ensure non-discriminatory wholesaling to new entrants, it was the author's view that, taken as a whole, the government's efforts are insufficient and that a fair competitive environment has not been established. This has been proven in a disappointing manner.

Responsibilities of the Electricity and Gas Surveillance Commission

It is the major electric power companies mentioned above that are alleged to have violated the Antimonopoly Law. Needless to say, if the JFTC's findings are correct, primary responsibility lies with those former monopolies. The Federation of Electric Power Companies of Japan (FEPC) has been advocating that "We will actively work to ensure that the electric power system reform is a reform that truly benefits our customers.⁴ However, as a public utility with a long history, the major electric power companies involved must reflect greatly on their actions that have overturned this premise. The focus will also be on whether the cartel was a front-line decision, whether top management approved of it, and whether the other major power companies were uninvolved.

At the same time, as the author who has been engaged in policy discussions with people from the EGC and the Energy Agency, I cannot help but point out the responsibility of the competent authorities. EGC is an independent regulatory agency that was established in 2015 to take a more professional and focused approach to competition policy in the liberalization of the power utility industry. When liberalizing a statutory monopoly sector, the JFTC, which monitors market competition broadly, is often not sufficient, so a regulatory agency specializing in that sector is often established. The fact that the JFTC has now uncovered the cartel means that the EGC overlooked the illegal activities, which could lead to a loss of credibility in the overall competition policy in the electric utility industry to date.

At the 2012 Special Committee on Electricity System Reform, which discussed the establishment of a regulatory body, the author, who was one of the committee members then, pointed out that it should be a so-called "three-article body" in order to enhance the independence of the organization, but this was not approved. It will be necessary to have the commission thoroughly examine why the EGC did not notice the cartel this time, reflect on its relationship with the power companies and take countermeasures including future organizational restructuring.

Prioritize the Creation of a Fair Competitive Environment

In recent years, a number of new retail power companies have withdrawn from the market or closed their businesses in response to the historic rise in electricity spot prices, and some have criticized them for making easy business decisions. However, if the major power companies were indeed engaged in a cartel, one cannot help but wonder whether the conditions of competition with the new power companies were appropriate.

Again, a fair competitive environment is a prerequisite for electric power system reform, including efficient adjustment of supply and demand through the market and ingenuity over prices and services by the various entrants. These will surely benefit consumers, invigorate the market as a whole, and in turn benefit competitive companies. The power system reform had the objective of turning the entire electric power industry into a growth industry, but the current situation is far from ideal. It is not because the direction of the power system reform was wrong, but because the way the power system reform was carried out was wrong and the competition policy was inadequate.

At this juncture, the Agency for Natural Resources and Energy is strongly promoting policies in the direction desired by the major electric utilities, including a sharp shift to promoting nuclear power generation and a capacity market that includes auctions for long-term decarbonized power sources. Subsidies for electricity price hikes are also planned, in part to support electric utilities (including new power companies) struggling with soaring fuel prices. This year has seen a flurry of market intervention measures in the name of "stable supply," "decarbonization," and "price reductions," but all should be premised on fair competition. Both the government and the electric power companies should keep in mind the basic principles of power system reform and give top priority to the creation of a fair competitive environment.