Quantitative Evaluation and Analysis of the Internal Price Gap in the Town Gas Industry in Japan

Author Name KAINOU Kazunari  (Fellow, RIETI)
Creation Date/NO. February 2008 08-J-001
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In the Japanese town gas industry, a series of partial liberalization measures and other regulation changes have been carried out since the second half of the 1990s with the aim of maintaining and expanding economic welfare and reducing prices through the promotion of competition.

Nevertheless, there still remains a substantial "internal price gap" between Japanese town gas companies. For determining the cause of this, all that has been done to date is advance qualitative explanations and conduct external comparative analyses, for example as regards disparities in population density and management scale and differences in raw materials, and no particularly clear light has been cast on the relationship between factor analysis of the internal price gap and the policy and system changes.

In this paper I use Gas Industry Annual Statistics of Japan to conduct a cross-sectional analysis of management indicators in the town gas industry prior to and after the policy and regulation changes. By analyzing the relationship between the factors behind the internal price gap and the policy and regulation changes, I attempt to evaluate and analyze quantitatively what kinds of policy and regulation measures could mitigate or eliminate this internal gap in the future.

As a result of the evaluation and analysis I confirm that the internal price gap of town gas has a tendency to increase in accordance with the widening of the gap of capital and labor productivity between companies, and that both capital and labor productivity have a positive correlation with indicators of management efficiency such as management scale, sales volume per customer, and annual load factor. I find that the productivity of capital is low in public utilities.

With regard to the cost, I confirm that the cost of producing town gas has a positive correlation with the reciprocal of aggregate sales volume, and thus that strong economies of scale come into play. I also confirm that supply cost and management cost have a strong negative correlation with indicators of management efficiency such as sales volume per customer, annual load factor, and area diffusion rate. This demonstrates that disparities of scale and management efficiency cause cost differences and give rise to internal price gap.

On the other hand, when looking at a comparative analysis of 1995 and 2005 there is no evidence that the series of policy and regulation changes had any impact in the direction of reducing the internal price gap.

I believe it is necessary for the town gas regulator to implement corrective measures for the internal price gap, such as the vigorous promotion of mergers and partnerships between companies, the introduction of tariff systems such as demand side management (DSM) for load-leveling, and the privatization of public utilities. These corrective measures for the internal price gap should set the clear goal for all town gas companies to achieve the present mean value of capital and labor productivity in the near future.