Quantitative Analysis of the Impact of Changes in Policies and Regulations for Electricity and Town Gas Supply Industries

Author Name KAINOU Kazunari  (Fellow, RIETI)
Creation Date/NO. December 2005 05-J-034
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In the 1990s, a series of changes were made to policies and regulations governing electricity and town gas supply industries in Japan. To evaluate how such regulatory changes, channeled through the behavior of power/gas companies, have affected the economic welfare of the electricity and town gas markets, it is necessary to first quantitatively analyze how the power/gas companies reacted to the regulatory changes in terms of management behavior. Specifically, it must be examined what decisions the power/gas companies made with respect to their pricing structures as well as to cost-cutting efforts such as rationalization of facility investments, as well as saving on operating costs. Then, based on the results of these analyses, it is necessary to estimate and evaluate the changes in the total market surplus and the way such surplus is distributed between consumers and producers.

This paper attempts to empirically analyze and evaluate the effectiveness and problems of changes made to government policies for the electricity and town gas supply industry;

the highly regulated industries characterized by a regional monopoly structure. Specifically, based on data disclosed on the financial statements of the major companies as well as on other publicly available documents, the movements of the electricity/gas prices and the changes in facility investments and operating costs were reworked into a model for each of their service areas, thereby quantitatively estimating the impact of the policy shifts on their management behavior. Furthermore, the changes in the total market surplus and the respective portions of such a surplus distributed to consumers and suppliers were estimated.

The analysis and evaluation results show that both power companies and town gas companies, in response to "partial liberalization" and other changes in government policies and regulations, did reinforce cost-cutting efforts through the rationalization of facility investments, reduction of operating costs and so forth. It was estimated that 4-5 percentage points out of the 15%-20% reduction in the average cost in the past 15 years for these industries are attributable to the impact of the changes in government policy and regulations.

As far as the electricity industry is concerned, such reduction in the average cost was appropriately reflected in the prices for both industrial and household users with the changes in the total market surplus continuing to increase throughout a period before and after the policy shift. From this it is inferred that the changes in government policies and regulations for the electricity industry were effective in expanding economic welfare.

On the other hand, the reduction in the average cost in the town gas industry is reflected only on the prices applicable to industrial users. This is probably due to certain deficiencies in the way government policies were altered; the change in consumer surplus in the household gas supply market failed to increase while a conspicuous increase in both operating profits and net worth of town gas companies coincided with the partial liberalization of the town gas industry. This suggests the possibility that the changes in government policy and regulations with respect to the town gas industry had an adverse effect on economic welfare.

To pin down the town gas market problem more accurately, thereby preventing similar problems and improving the current situation, it is necessary to promote the disclosure of management data and information for both household and industrial town gas market and to implement effective and enforceable measures such as establishing a mechanism under which economic welfare would be subjected to continuous analysis and monitoring. And it is necessary to establish an admonition mandate for the government in response to behavior of town gas companies detrimental to economic welfare before invoking serious business prohibition mandates for them.