Enron Mail

Subject:How Japanese thinks electricity business?
Date:Fri, 28 Sep 2001 05:51:21 -0700 (PDT)


Tuesday, September 25, 2001
Tepco Chief Braces For Lower Power Demand From Ind Users

TOKYO (Nikkei)--Terrorist attacks and the subsequent fall in U.S. stock
prices have diminished the confidence of Japanese businesses and
investors, who were already reeling from a global slowdown.

In an interview with The Nihon Keizai Shimbun, Nobuya Minami, president
of Tokyo Electric Power Co. (9501), said he is prepared to see power
demand from large-lot users weakening amid the slumping economy.
Excerpts follow:

Q: How do you view the stock price plunge that has occurred in the
aftermath of terrorist attacks in the U.S.?

A: Japanese stock prices were falling before the attacks, suggesting
that prices may have been inflated to begin with. I think stock prices
may fall further because it's inevitable that companies will collapse as
financial institutions expedite disposal of bad loans.

Q: What's your outlook on the economy and demand for electricity?

A: It's still too early to assess the true economic impact of the
terrorist attacks, but it will be a considerable blow to the sluggish
Japanese economy. The so-called "hollowing out" of the Japanese
manufacturing industry is likely to gather speed as more producers
transfer their factories to China and other Asian countries.

Consumption of electricity was high this summer, but volume customers
are using less because industrial activities continue to slump. I expect
consumption among volume users will begin rising once the bad debt
liquidation phase has passed.

Q: Do you have concerns about rising oil prices given the situation in
the Middle East.

A: Japan depends less on oil now than we did in the 1970s, when there
was a major oil crisis. Our energy sources are more diverse and our oil
reserve system is in good shape. There may be price hikes, but the
impact will be much smaller this time.

Q: Will Tokyo Electric reduce capital investment further?

A: We decided last spring to keep our annual capital investment under
900 billion yen on average for the next three years. That's about 40%
lower than our capital spending during peak times. We'll make further
adjustments if necessary when we create a new capital investment plan
next spring.

Q: While most companies are struggling, Tokyo Electric is expected to
post its highest group net profit since it began reporting group
earnings in fiscal 1994. There are increasing calls to lower electricity
charges, aren't there?

A: We plan to lower the charges in the medium to long term.

Q: What do you say to the view that demand for electricity is unlikely
to rise in the long term, given rising environmental awareness among
Japanese consumers?

A: I think an increasing number of environmentally conscious people will
cut consumption as they pursue a life that's less driven by consumption.
Electric companies have to develop new revenue sources, such as energy
conservation consulting.

Q: In the U.S. and Europe, many utility companies handle both
electricity and gas. Do you think Japanese electric companies will do
the same?

A: As deregulation advances, the boundaries between electricity, gas and
oil industries in Japan will probably become more blurred. Tokyo
Electric has to become a more comprehensive company that can deliver
whatever energy the market demands.

(The Nihon Keizai Shimbun Tuesday morning edition)

Issued: September 24, 2001
Power deregulation fails to connect
New entrants impeded by high up-front costs; some foreign firms prefer
trading or other niches

Staff writer

Ennet Corp., an independent power provider established by the NTT group
and others, operates this power plant, which started up in July, in
Ibaraki Prefecture.

Some 18 months after the partial deregulation of the electricity market,
new entrants are beginning to wonder if they really are facing free and
fair competition for the potentially huge profits. Meanwhile, some
foreign firms are utilizing their advantages, such as expertise in
power-related financial trading, to carve out new niches unexplored by
Japan's tradition-bound regional power utilities.

Since March 2000, when the government revised the Electricity Utilities
Industry Law to allow free entry to the retail market for large-lot
users, nine domestic companies have notified the Ministry of Economy,
Trade and Industry of their plans to enter the market. While not yet
submitting such notifications, at least three foreign firms - Enron
Japan Corp., InterGen (HK) Ltd. and El Paso Japan Co. - have started
feasibility studies or negotiations with potential clients.

In spite of the sluggish economy, the utility business appeared to be a
promising field because of its huge potential: Full-scale deregulation
will give access to a market worth around 15 trillion yen ($127 billion)
a year, making Japan the world's second-largest electricity market.
Further, the market keeps growing at a rate of 1-2% a year. So even when
just 30% of the market was opened, there was a rush of new entrants.

But their expectations have been largely disappointed. According to an
estimate by the Trade Ministry, new entrants have only a 0.2% share of
the market. The difficulty in constructing new power plants, high
transmission costs and an uncertain deregulation schedule are slowing
new participants' expansion of business.

Enron, which opened a Tokyo office in July last year, is mounting an
active challenge to Japan's regulations and traditional business
customs. In May, its local unit released proposals on electricity reform
via the Internet, which say that if the Japanese electricity market had
introduced fair competition and reduced electricity costs to the level
of the U.S., large-lot customers could have cut their electricity costs
by around 4 trillion yen a year.

Nicholas O'Day, vice president of Enron Japan, does not try to hide his
irritation at the slow progress of the deregulation process and
indicates that strong government leadership is needed to enforce further
reform. Especially, Enron and other new entrants want to see sharp
reductions in the transmission fees charged to independent power
providers by the utilities for access to their transmission lines.

Satoshi Abe, senior analyst at Daiwa Institute of Research, said: "Most
clients in the deregulated market are industrial customers that already
enjoy low electricity costs amounting to 12 yen per kilowatt-hour. The
average generating cost is 7 yen per kilowatt-hour, and new entrants pay
around 4-5 yen per kilowatt-hour to utilities in transmission charges
and other fees. So there's no room for profit."

However, Hiroshi Araki, manager of corporate planning at Tokyo Electric
Power Co. (Tepco), argued, "We face the same cost when we use our own
transmission lines, so we're competing on an equal footing with the new

Another disappointment for the new suppliers was the difficulty of
obtaining additional electricity to sell. As building a power plant
requires an initial investment of at least 10 billion yen, most new
entrants planned to buy excess electricity from manufacturers who have
their own power generators and resell it.

But the plan soon ran into difficulties. "We could procure only 50-60%
of the electricity we needed, and we were forced to revise our business
model," said Tsutomu Takeda, vice president of Ennet Corp., an
independent power provider set up by the Nippon Telegraph and Telephone
Corp. group and others. To secure supplies for its main customer, the
NTT group, Ennet started operating a power plant in Ibaraki Prefecture
in July and plans three more in Chiba and Kyoto prefectures by autumn

For the foreign entrants, the situation is even more severe as they have
to build relationships with customers and find suitable sites to build
power plants from scratch. Earlier this year, two U.S. power companies,
El Paso and InterGen, opened branches in Tokyo, but they say they are
just waiting and watching developments for now.

Stephen Del Regno, president of El Paso Japan, compared the situation
here to that of South Korea, which is also deregulating. "In South
Korea, land and labor costs are also very high, but it is still more
than 50% cheaper to build a power plant there."

Keys Curry, head representative at InterGen, said: "The environmental
impact assessment process is quite long in Japan. So if you want to
build a large power plant, it takes at least six years. Who can propose
to clients to buy electricity that will be provided six years later?"

Financial products

Seeing these difficulties, some foreign companies chose to start by
offering financial products hedging risk, and follow by trading
electricity or futures contracts. Enron is the forerunner in the field,
offering weather derivatives and other such products. The local unit of
a major U.S. brokerage has staged experimental futures trading of
electricity, gathering around 20 participants in March and May. Both
have power plants in the U.S., but here they are leaving actual
generation until later.

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