Energy in Japan

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1. OVERVIEW

1-1 Japan's Energy Policy Targets and Goals

The underlying goal of Japan's energy policy is to attain the 3Es, energy security, economic growth and environmental protection simultaneously.
By way of concrete guidelines to achieve these goals, the Advisory Committee for Energy, an advisory body to the Minister of International Trade and Industry, drew up a long-term energy supply-demand outlook in June 1994. Specifically, in terms of demand, the outlook points out that the annual energy consumption growth must be kept at about 1% until the year 2010 by stepping up energy conservation measures. On the supply side, the outlook states that Japan must reduce its dependency on oil to about 48% by the year 2010, achieved by promoting the use of nuclear power and non-fossil energy sources such as renewable energy and natural gas, which are outstanding power sources from environmental standpoints.
Only by fulfilling this long-term energy supply-demand outlook can Japan meet the goal of curbing carbon dioxide emissions outlined in the Action Program to Arrest Global Warming.

(1) Energy Security-Secure Stable Energy Supply

At present, Japan depends on imports for more than 80% of its energy supply, and in fact, imports almost all of its petroleum. This is an extremely high percentage for an industrialized nation.
Japan recognized the fragility of its energy supply structure during the two oil crises. Hence, one of the most important issues in Japan's energy policy is to secure a stable supply of energy, which is indispensable to the daily life of its citizens and its industrial activity.
To achieve its goal, Japan has put into effect following policies,

to encourage the introduction of alternative energy
to promote energy-conservation measures.
to decrease dependence of petroleum (80% in 1st Oil crises ｢ｪ 56% in 1995)
to diversify its sources of energy from the Middle East
to coop with the International Energy Agency
stockpiles petroleum and maintain other emergency response measures
in accordance with the international agreement.

<future measures>
to stabilize the demand of energy
to secure a supply of other energy sources such as coal, natural gas, LPG
to further diversify the sources of supply.
to coop with petroleum-producing countries closely
to promote natural gas development
to establish a coal supply structure.
to promote the establishment of nuclear power generation

Internationally, rapidly growing demand in the Asian region in recent years is beginning to have a great impact on the world energy supply and demand situation and on the global environment.

<THE INTERNATIONAL ENERGY SUBCOMMITTEE>
In June 1995, the International Energy Subcommittee of the Advisory Committee for Energy, which is an advisory body to the Minister of International Trade and Industry, put together an interim report. This report predicts that as the appetite for primary energy in the East Asian region continues to grow, demand will be doubled from its 1992 levels by the year 2010. At this pace, energy production in the region will be unable to keep up with the demand and the result will be a noticeably increased dependence on energy sources from outside the region. The report also outlines proposals for ways in which Japan should approach the international aspect of its energy policies.

<APEC>
In May 1990, the APEC set up a working group to study energy issues. In 1995, the group compiled the APEC Action Agenda, setting forth the aim of simultaneously achieving the 3Es within the APEC region. As a forum for dialogue and discussions on energy policies among APEC member economies to simultaneously achieve the 3Es, the Asia-Pacific Energy Research Center was established in Tokyo in July 1996 under the initiative of Japan. The center is expected to foster an understanding and awareness to be shared among APEC member economies concerning the future energy supply-demand structure within the region. The center invites researchers from APEC member nations and regions to work on numerous joint projects including the APEC energy supply-demand outlook slated to be drawn up by the end of 1997. Next year, Japan will host the 3rd Meeting of APEC Energy Ministers in Okinawa. At the meeting, we will continue the work we have done so far, and engage in full-fledged policy discussions based on the outlook.If you are interested in the 3rd Meeting of APEC Energy Ministers, please see a homepage of the meeting, http://lifeserver.co.jp/APEC.

(2). Economic Growth - Promote Economic Efficiency of Energy Industry

Recently, there has been growing concern that the institutionalized framework that had supported the development of Japan's economy and the stability of the nation's affairs may be putting a damper on future development. This concern has spurred the nation to take a hard look at structural reform. In the energy field, the current system is undergoing a review based on the ideas of operating on free enterprise principles during normal times, with restrictive policies put in place only during emergencies, and of protecting the consumer by introducing the principles of competition.

<GAS> see 2.3 C
In March 1995, the revised Gas Utility Industry Law took effect. As a result, general gas suppliers and large-volume customers are able to freely negotiate conditions for supplying gas. General gas suppliers are also able to provide gas outside their distribution service areas under certain conditions.

<ELECTRICITY> see 2.3 B
In December 1995, the amended Electricity Utility Industry Law went into effect. The amendments promoted new entrants into the power generation sector, such as the Independent Power Producers who provide electricity at wholesale prices; improved tariff regulations; and introduced a system to activate wholesale wheeling; realized flexibility into the system of setting rates. As a new tariff setting schemes, the yardstick formula was introduced to encourage cost-conscious management. Under this system, all electricity and gas utility companies have revised their rates since January 1996.

<PETROLEUM> see 2.3 A
In April 1996, reforms took effect in the petroleum sector. The Provisional Measures Law on the Importation of Specific Petroleum Refined Products, which had limited importers of gasoline, light oil, and kerosene to oil refineries, was repealed. The importation of petroleum products was open to anyone as long as the importer fulfills the stockpiling requirement of at least 70 days equivalent of the previous 12 months import and the quality control obligation for environmental and safety reasons. In October 1996, the Designated Area System, which had restricted the addition of new gas stations in areas of excessive competition, was abolished.
At present, Japan is in the process of considering a further review of the regulatory systems in each of the energy fields.

(3) Environmental Protection

In October 1990, Japan decided on an action plan to prevent global warming at a meeting of cabinet ministers concerned with the protection of the global environment. The plan states that by the year 2000, Japan intends to stabilize carbon dioxide emissions per person at 1990 levels. This was also set forth as Japan's goal in the Framework Convention on Climate Change that took effect in March 1994.

<LONG-TERM ENERGY SUPPLY/DEMAND OUTLOOK>
These international and domestic frameworks provided a basis for the Energy Supply and Demand Subcommittee of the Advisory Committee for Energy to revise its long-term energy supply/demand outlook in June 1994. This outlook is an index that identifies the energy policies that will achieve the best mix of energy sources for Japan. It also indicates how Japan can achieve its goal of controlling carbon dioxide emissions. The current outlook points out that energy consumption growth must be kept to approximately one percent annually until the year 2010, through intensifying measures to save energy. On the supply side, the outlook specifies that Japan must decrease its dependency on oil to 48% by the year 2010 by promoting the use of natural gas, and non-fossil energy sources, such as renewable energy, and nuclear power, which are excellent power sources from the viewpoint of achieving the CO2 emission level.

<ACTUAL SITUATION>
Japan's final energy consumption, however, grew by more than three percent in 1994 and 1995. Meanwhile, on the supply side, the lead-time needed for sitting nuclear power plants has grown and delays have occurred in the introduction of renewable energy sources. The 1995 incident at the Monju fast-breeder reactor has caused public distrust of the nuclear power policy.

<COP3>
Turning to current international debates on the global climate changes, countries will present their action plans for how to deal with the issue after the year 2000 at the Third Conference of the Parties to the Climate Change Convention (COP3) to be held in Kyoto in December 1997.
As host nation of COP3, Japan must take every opportunity to coordinate views among the participating countries.

<THE SUBCOMMITTEE OF BASIC POLICIES DIRECTIONS>
In this context, the Subcommittee of Basic Policies Directions of the Advisory Committee for Energy discussed the shape of the energy policies of the present, as well as the energy policies for the year 2010 and beyond by developing simulations for very long-term energy supply/demand. An interim report was issued in December 1996. Parallel with the debate in this subcommittee, the Nuclear Power Subcommittee of the Advisory Committee for Energy conducted another examination of the issue of nuclear power generation. Its report was issued in January 1997.

<NEW CONSERVATION MEASURES>
In March 1997, a conference on promoting policies for conserving energy and resources, which consisted of cabinet ministers, approved an array of comprehensive energy-saving measures for the year 2000. New energy conservation measures will be aggressively introduced in all areas, manufacturing, residential/commercial use, and transportation, where there is a room for a stronger energy-saving efforts. And the government is committed to an annual follow-up review of such policies.

<THE LAW OF NEW ENERGY>
In addition, the Law on Promoting New Energy Use was promulgated in April and will take effect until October. This new law is expected to promote the use of renewable energy sources and so on in the future.

1-2 Energy Situation

1.Japan's Total Primary Energy Supply (in FY1995) was 588 Million kl crude oil equivalent.

Source:MITI

It is evident judging from the figures listed above that Japan is still heavily dependent on oil even though Japan has experienced a dramatic decline in its dependency from 77.4% in 1973 to present 55.8%.

Source: IEA Energy Balances 1997

2. The above-mentioned decline in oil dependency can be mainly attributed to Japanese industries efforts in energy conservation and Japan's development of alternative energy resources.

3. A key feature of Japan's energy consumption is that the industrial sector accounts for the bulk of the total spent - 49.6% (in FY1995) compared with private sector at 26.3% and transportation sector at 24.1%

4. In 1995 Japan imported 99.7% of the oil consumed in Japan, and 78.6% of crude oil was imported from Middle Eastern countries.

TABLE 1.1 Breakdown of Japan's Total Primary Energy Supply
(unit:%)

(Source:MITI)

1-3 The Long-Term Energy Supply/Demand Outlook

1. The What's and Why's of the Outlook
The Long-Term Energy Supply/Demand Outlook was established by the Advisory Committee for Energy, (the advisory board of the Minister of International Trade and Industry) in order to clarify the goals and tasks of Japan's energy policy by predicting Japan's future energy supply/demand balance.

2. Background of the Latest Revision in 1994
Outlook was revised 4 years after its last revision in 1990. The changes were made in accordance with the recent developments in the world/domestic energy situation (low crude oil prices, delay in development and introduction of nuclear/new energy, etc.) and the growing concern on global environmental issues.

TABLE1.7 TOTAL PRIMARY ENERGY SUPPLY OUTLOOK

Case1:Business as usual (no additional energy conservation measures)scenario
Case2:Scenario with additional measures for energy conservation and development and introduction of new energy

1-4 Goals for Oil Alternative Energy Supplies

1.The Alternative Energy Supply Target was developed (Cabinet Decision, Sept.1994 ) with the approval of the National Energy Council of Ministers,after the issuance of the revision of " Long-Term Energy Supply / Demand Outlook " complied in June 1994.

2.The Target specifies the following:
(1)Specific types of oil-alternative energies to be developed and introduced
(2)Supply targets ( in terms of volume ) of above-mentioned energies
assuming; a ) maximum level of understanding and effort from the private sector
b ) implementation of prioritized and well-defined policy government measures
c ) closer cooperation between private and government sectors
from the standpoint of "comprehensive security of energy supplies" (based on the Law Concerning The Promotion of Development and Introduction of Oil Alternative Energy [Art 3]) along with the concern over environmental protection.

3. According to the Targets, the total amount of the oil-alternative energy supply (coal,nuclear,natural gas,new energy,etc.) in FY 2010 will be equivalent to 33 billion kl oil. The share of oil alternative energy among TPES is expected to rise to 52% in FY 2010,up to 10% from FY 1992.

TABLE1.8 ALTERNATIVE ENERGY SUPPLY TARGETS

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2. CURRENT TOPICS
2-1 Advisory Committee for Energy

a. The Interim Report of the Subcommittee of Basic Policy Directions, Advisory Committee for Energy
- Tasks of Future Energy Policies -

1. Studies made by the Advisory Committee for Energy
Over the past few years, the energy situations in Japan and overseas has remained relatively calm. The looming sense of crisis that had prevailed during the oil crises seems to be fading from people's minds.
Contrary to this superficial calmness, Japan in fact faces a number of serious problems related to energy. To realize sustainable economic growth, Japan, a country poor in natural resources, must carry out sound energy policies that include guaranteeing energy security and addressing global environmental issues.
To this end, the Subcommittee of Basic Policy Directions of the Advisory Committee for Energy, which is an advisory body to the Minister of International Trade and Industry, has been conducting extensive studies since May 1996 on the direction of future energy policies. An interim report was drawn up in December of the same year.

2. Fundamental awareness of the issues and other matters
The basic goal of Japan's energy policies is the simultaneous attainment of the 3Es- Economic Growth, Energy Security, and Environmental Protection. This is no easy task, however, as there inevitably is a trade-off among the three. To present a concrete policy goal, therefore, the Advisory Committee for Energy established a long-term energy supply-demand outlook, and is working to promote energy measures in different sectors.
Recently, Japan's energy consumption has risen sharply for two consecutive years, and if left unattended, it will be difficult to achieve the long-term energy supply-demand outlook.
Moreover, the increase in our country's energy consumption also signifies an increase in energy-related carbon dioxide emissions. If things should continue as they are now, Japan will not be able to meet its target (Action Program to Arrest Global Warming) of stabilizing per capital carbon dioxide emissions after the year 2000 to roughly the 1990 level (approximately 2.6 tons).
In addition, the growing worldwide dependency on the Middle East for oil in recent years and Asia's dramatic increase in energy demand are liable to become factors that could destabilize future energy supply-demand situations, including those of Japan. There is a danger that the latter, in particular, will have serious impacts on the environment such as global warming and acid rain.
Under these circumstances, Japan must incorporate the following perspectives when promoting energy policies:

(1) For the time being, promote additional measures related to energy conservation and new energy sources to attain the energy policy goals laid out in the long-term energy supply-demand outlook.

(2) Although nuclear power accounts for 12% of our country's energy supply and 34% of electricity supply, there is a mounting public distrust of nuclear energy policies in the wake of the prolongation of nuclear power siting and the Monju accident. Thus, re-examine how nuclear energy should be positioned.

(3) In the long run, continue research on the ideal state of future energy policies while carefully monitoring changes in the economic social structure and incorporating ultra-long-term outlooks into the energy supply-demand structure.

3. The current supply-demand outlook and measures to achieve it
For now, the following additional measures will be carried out to attain the goals which the long-term energy supply-demand outlook sets forth for the year 2000.
Energy conservation > Accumulate efforts by each sector and implement cross-sectional measures
To keep the final energy consumption in the year 2000 to the level projected in the current supply-demand outlook, the energy consumption growth rate must be suppressed to 0% after 1995.

* Additional measures
｡｡｡ｦIndustrial sector: Boost the application of Energy Conservation Law and encourage voluntary efforts (aim at reducing per-factory energy intensity by more than 1% each year), etc.
｡｡｡ｦPublic welfare sector: Improve equipment efficiency and insulation of houses and buildings, etc.
｡｡｡ｦTransport sector: Improve equipment and distribution efficiency,etc.
｡｡｡ｦCross-sectional measures: Promote energy conservation activities carried out by local public organizations, convert to energy-saving lifestyles, promote energy-saving DSM, etc.

New energy sources > Step up the spread of such sources by offering concentrated support
In order for new energy sources to attain a 2.0% share in the total supply of primary energy, which is the goal specified in the current supply-demand outlook for the year 2000, the following additional measures must be carried out:
｡｡｡ｦDrawing up of basic policies by the government; clarification of the role of each entity (national and local public organizations, enterprises and the general public); and providing support to new energy introduction businesses including sales of energy generated by wind power
｡｡｡ｦHelp make solar power generation profitable as a business
｡｡｡ｦSupport local public organizations' innovative activities to introduce new energy sources such as using a large number of cars that run on clean energy

｡｡｡ｦNuclear power > Promote nuclear power policies drawn up from citizens' perspectives
Work to restore people's faith in nuclear power policies by thoroughly publicizing information and by implementing regional activities aimed at the long-term development of the siting areas.

4. A very long-term simulation
Results of very long-term simulation
To make a long-term projection of Japan's energy issues, a simulation to FY2030 was conducted.
The results show that if policies for conservation and new energy introduction are drastically strengthened and the current nuclear development plan is realized, CO2 emissions in 2030 will go down to the same level as in 1990.
To simultaneously achieve the "3E's," Japan will be forced to make difficult choices concerning its energy policies, such as undertaking fundamental changes in lifestyles, bearing huge costs, and introducing regulatory measures. These are "painful" choices, and must ultimately be left to the people to decide.

5. A message from the Advisory Committee for Energy
The study conducted by the Advisory Committee for Energy identified a number of potentially serious problems in Japan's energy situation that exist despite superficial calmness, and it calls for boldly tackling these problems from both domestic and international perspectives. Moreover, the study pointed out the possibility that dealing with these problems may entail substantial sacrifice on the part of the people, at times forcing them to give up the comfortable ways of life they now enjoy, for example.
Lastly, the committee issued the following message to Japanese citizens;

"With the 21st century just a few years away, Japan stands at a major crossroads in terms of energy. The hurdles of tasks we must surmount are by no means low, and, unless we change our lifestyles and the socio-economic system, we will not be able to overcome them. It will take some more time to come up with a clear-cut answer. What we are expected to start now, in the meantime, is for each and every one of us to re-examine our daily living from its very foundation. The Committee sincerely hopes that this report will help deepen people's understanding of the energy issues and induce active discussions and exchanges among the people."

A very long-term simulation

Scenarios that Japan will face in a trade-off among the "3E's"

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Simulation scenarios and trial calculation results

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2-2a. The Law Concerning Promotion of the Use of New Energy

1.The need to establish a new law

2.Legislative Plan Outline

Draw up and announce the basic policies for comprehensively promoting the use of new energies.

Based on the basic policy, stipulate the obligations that energy users, energy suppliers and manufacturers/importers need to make in order to promote the use of new energies.

Draw up and announce guidelines that outline specific steps in using new energies. The relevant minister will provide instructions and advice to energy users as required.

Stipulate that when drawing up and implementing measures that help promote the use of new energies in the region, local public bodies must take the basic policy into consideration.

The relevant minister approves the plans (usage plans)of enterprises who use new energies and work out financial support and other measures.
(Examples of enterprises)

2-2 b. Summary of Comprehensive Energy Conservation Measures toward the Year 2000 (April, 1997)

Agency of Natural Resources and Energy

1. Background
Energy consumption continues to grow consistently in Japan because of a recovery in economic activities, movement toward information-oriented society, and changes in people's lifestyles, particularly with regard to the increases in the size of home electronics appliances and cars. If this trend continues, it would be extremely difficult for Japan to meet the long-term energy supply-demand outlook for the year 2000 and the CO2 emission targets laid down in the Action Program to Arrest Global Warming. Therefore, Japan must make maximum efforts for much promotion of energy conservation toward the year 2000 in order to achieve 0% growth in energy consumption.
In order to achieve 0% growth goals, at the Ministerial Council for Comprehensive Energy Measures which was held on April 1 with the cooperation of all ministries, the decision was reached on measures designed to promote comprehensive energy policies. Included in these measures were over 60 specific new or reinforced steps spanning all sectors, including industry, residential and commercial, and transportation.
On the basis of these measures, Government of Japan shall study and implement concrete measures to be taken and provide follow-up for them each year.

2. Major Specific Measures
(1)Industrial sector
｡ｦIntroduce quantitative targets at each factory (improve energy efficiency by more than 1% each year)
Based on the Energy Conservation Law, targets shall be set up for each factory or company that call for an average annual reduction of energy intensity by more than 1%. The aim is to promote voluntary energy conservation at each factory.

｡ｦStrengthen instructions provided to designated factories based on the Energy Conservation Law (comprehensive inspection of all factories)
By conducting on-site surveys of energy-consuming factories designated as targets for energy management in the Energy Conservation Law, identify those factories that are not energy efficient and strengthen instructions and/or guidance offered to them.

(2)Residential and Commercial sector
｡ｦEstablish and promote a guidance standard on home heat insulation and other items(Next-Generation Energy Conservation Standard)
To promote the increase in the number of homes with efficient heat insulation, a guidance standard (to be tentatively called "Next-Generation Energy Conservation Standard") which will be more effective than the existing energy conservation standard for homes based on the Energy Conservation Law, will be established and announced.

｡ｦIntroduce energy conservation labels for use in houses and buildings
To encourage the construction and user selection of energy-conserving houses and buildings, study the introduction of an energy conservation mark that would alert the consumers, in easy to understand terms, of the energy-saving features of a particular house or a building.

｡ｦFoster and support energy conservation service enterprises (ESCOs)
Energy service companies (ESCO) are new types of businesses that provide comprehensive energy conservation services to buildings and factories. To assist in the development of such companies, model contracts will be established and innovative private ESCOs will be provided with subsidies for conducting their model businesses.

｡ｦCreate an easy-to-understand labeling system that helps consumers identify energy-saving household electrical appliances
In the Energy Conservation Law, energy consumption efficiency must be labeled for"specified apparatuses. Studies will be conducted to improve such energy efficiency labels especially for household electrical appliances so that they are made easier to understand (creation of an energy conservation labeling system). Revised labeling systems will be implemented one by one after fiscal 1998. Introduction of labels that provide relative comparisons will also be studied.

｡ｦEstablish an energy conservation standard (target) for refrigerators and other appliances based on the Energy Conservation Law
By about mid-1997, add refrigerators to specified equipments in the Energy Conservation Law and establish energy conservation targets that manufacturers will be required to meet.
In addition, begin studying other consumer apparatuses so that they can also be designated as specified apparatuses.

｡ｦProliferate and promote the use of energy-saving equipments such as air conditioning systems with heat regenerators
Promote the proliferation of air conditioning systems with heat regenerators and natural gas air conditioners through support measures such as providing interest subsidies.

(3)Transportation sector
｡ｦEstablish an energy conservation standard (target) for diesel automobiles based on the Energy Conservation Law
Designate diesel passenger cars as "specified machineries" in the Energy Conservation Law by fiscal year 1998 and diesel trucks (heavy vehicles) by fiscal year 2000, and set up fuel consumption targets that manufacturers will be required to meet.

｡ｦDraw up the "Comprehensive Plan to Facilitate Traffic Flow in Urban Areas" that controls traffic demand and facilitates traffic flow in cities
To facilitate the flow of traffic in urban areas, set up concrete targets to re-examine trips taken in cities. Establish and implement, beginning fiscal 1997 in several cities nationwide,the "Comprehensive Plan to Facilitate Traffic Flow in Urban Areas" that consists of implementing the following measures in combination: measures to expand traffic capacity, traffic demand management (TDM) measures, and multi-modal measures.

｡ｦFully implement traffic demand management (TDM) measures
Fully implement TDM measures primarily in cities that carry out comprehensive model anti-congestion measures. To encourage car users to change their transportation patterns and make traffic at the city or regional level flow more smoothly, the TDM program including the keeping of car pools, Introduction of flextime for commuting, and building of more parking spaces for introducing park-and-ride systems will be promoted.

｡ｦPromote comprehensive measures to improve infrastructure, promote deregulation, enhance information exchange and standardization, and support enterprises, all of which will help improve distribution (establishment of General Principles on Comprehensive Distribution Measures)
With the establishment of the General Principles on Comprehensive Distribution Measures and with the cooperation of relevant ministries, conduct comprehensive measures to improve infrastructure and promote deregulation as well as enhance information exchange and standardization among businesses. In so doing, improve distribution efficiency and, consequently, improve energy consumption efficiency in the distribution sector.

｡ｦStrengthen measures to deal with illegal parking
Build and improve parking spaces and lots, enforce tougher control on illegal parking, introduce various systems related to parking measures, and enact regulations to prevent illegal parking.

(4) Cross-sectional measures
｡ｦSupport innovative regional energy conservation activities carried out by local public organizations
In fiscal 1997, establish a support system with subsidies that help local public organizations promote the building of energy-efficient houses and buildings, make distribution more efficient, and encourage other energy conservation activities that should be tackled on a regional basis.

｡ｦStrengthen education on energy and the environment at schools (promotion of Eco-Schools)
To construct school facilities that conserve energy and reduce negative environmental impact, implement pilot activities into the construction of energy- and environmentally-conscious schools and facilities (Eco-Schools) and contribute to the students' education concerning energy and the environment.

｡ｦFundamentally strengthen publicity on energy conservation
To further increase public awareness on energy conservation and promote specific energy conservation measures, step up publicity and PR activities through official bulletins, newspapers, magazines, television, and other publicity channels.

2-3 Deregulation
a. Petroleum

Deregulation of the Japan's Petroleum Industry

1. Priorities of Japanese Petroleum Policy

The fundamental goal of Japanese petroleum policy is to ensure a stable petroleum supply. Meanwhile, it has become another priority to realize petroleum product price levels comparable to other countries.
In addressing this issue, the internationalization of the domestic petroleum product market and the promotion of an efficient distribution system are essential. At the same time, due consideration should be given to environmental and safety concerns.

2. Deregulation of the Japanese Petrolerm Industry

Based on this assessment, we have undertaken the following structural reforms to realize an appropriate balance between stable and efficient supply of petroleum products.

(1) Liberalization of Petroleum Product Import : Repeal of Provisional Measures Law on the Importation of Specific Petroleum Refined Products The Provisional Law that designates only those who own refining facilities as importers of oil products had been effective in securing stable oil supply while maintaining a balance among various petroleum by-products of crude oil. Yet, it had consequently discouraged competition between domestically refined oil and imported one, and had impeded the efforts to correct the price levels and structure of petroleum products. Therefore, we liberalized the import of petroleum product by repealing the Provisional Law upon its expiration in March 1996, after taking the following measures regarding stockpiling and quality control.

A) Amendment of Petroleum Stockpiling Law
To prepare for an expansion of oil product importers, the Petroleum Stockpiling Law was revised so that stockpiling obligations would be shared among refiners and importers, in such a way as to appropriately respond to an emergency. More specifically, i) every petroleum importer should assume a stockpiling obligation irrespective of the amount of products it imports ; ii) importers should, in principle, stockpile the same types of products that they import ; iii) each importer's required amounts of stockpiles each month should be based on the scale of its activities in the previous twelve months ; and iv) the government should simplify reporting procedure and average the environment necessary for smooth fulfillment of stockpiling obligations.

B) Amendment of The Gasoline Retail Business Law
To prepare for imports of petroleum products with a wide variety of quality, a new quality control system was established under the amended quality control law titled Law on the Quality Control of Gasoline and Other Fuels. This law ensures an appropriate standard for specifications beyond the control of market mechanism.
More specifically, i) minimum number of specifications which cannot be left to market mechanism such as those involving environmental, safety and health matters is controlled to maintain the current quality level ; ii) not only distributors but basic suppliers (i.e., importers and refiners) and end distributors are responsible for meeting the quality specifications of petroleum products ; and iii) a marking system is adopted whereby specific marks is displayed in service stations indicating that the products meet a certain standard.

(2) Promotion of Distribution Efficiency (Abolition of Designated Area System) We have decided to gradually reduce the number of designated areas in which excessive competition is often seen. In these areas construction of service stations is restricted. Eventually the designated areas system will be abolished in October 1996.

3.Japanese Petroleum Market in the Transitional Period

Such drastic deregulation is causing significant changes in our petroleum market. Soon after we began discussing a new petroleum system, fierce competition broke out in the Japanese petroleum market as if deregulation had already taken place. As a result, prices of petroleum products fell sharply. More specifically, the retail price of gasoline fell from 122 to 106 yen per liter, a 16 yen drop. That was, without taxes, about a 25% drop. Even the prices of gas oil and kerosine, which had been kept at a lower level than that of gasoline, fell, despite the prices of crude oil rose.
Deregulation proved quite effective as newcomers, including general trading companies, began importing petroleum pedants and industry outsiders, such as large-scale commercial distributors, began retailing petroleum products. In addition, fierce competition in the market is quickly revising the unique price structure of petroleum products in Japan to conform with the international pricing structure.

4.Efforts by Japanese Petroleum Companies for Efficiency and Streamlining

As a result, the business climate in Japan for petroleum companies became quite difficult as the current profits of the refinery and wholesale sector nose-dived from $3.19 billion in fiscal 1994 to $1.89 billion in fiscal 1995 (41% down), furthermore, to $0.43 billion in the first half of fiscal 1996 (52.7% down from the first half of fiscal 1995). Their current profit ratio vis-a-vis sales amount decreased significantly from 2.26% in fiscal 1994 to 1.35% in fiscal 1995. The climate is equally tough for the distribution sector which is facing fierce challenges from newcomers from other sectors: in fiscal 1994, 39.7% of individual gas stations experienced deficit; 49.0% operated under the profit ratio of 1% or less; only 11.3% enjoyed the profit ratio above 1%. A decrease in the number of gas stations in fiscal 1995 despite the past steady increase since the beginning of 1990 reflects such a tough environment and the number of retirement of gasoline retail companies amounted to 1,531 in fiscal 1995.
To respond to such changes in the market, our petroleum industry is restructuring to achieve dramatic cost reductions, including downsizing the existing work force, reducing the number of new recruits, and logistical streamlining in order to make operations more efficient.

b. Electricity

Amendment to the Electricity Utilities Industry Law
1. Necessity of the Amendments

It is a necessity to improve the economic efficiency of the electric power supply system to secure a stable supply during the summer period. For this purpose, the Electricity Utilities Law was amended in April 1995, with the amendments taking effect in December 1995.

2. Outline of the Amendment

(1) Promoting New Entries into Power Generation Sector (IPP)
(IPP : Independent Power Producer)

(BACKGROUND)

• Opportunities for new of entry economically competitive firms run by medium/small power sources are recently expanding in high demand areas.
• It is essential 1 to facilitate appropriate measures to promote such new entries by potential entrants, and 2 to promote competition in the power generation sector.
• In addition, it is essential to form wider electricity wholesale markets by activating wholesale wheeling. (Wholesale wheeling : allowing power generating companies to utilize power utility companies' transmission line for transmitting electricity to areas outside the service area of that utility company.)

(NEW MEASURES)

1. Abolishment of the permit system in principle (except for large scale generators) for new entry of wholesale power companies (Independent Power Producer)
2. Introduction of a bidding system (for introducing equitable and transparent purchasing mechanism)
   - Bidding applied to the purchase of electricity by the general power utilities.
   - No approval is required for electricity sold in the bidding system.

FIGURE 2.5 Bidding providers and bidding scale

The scale of bids in 1996 was 2,655,000kw.
The application was approximately 4 times as much as bids. As a result, 3047,000kW was awarded.
The bidding providers in 1997, as well as the scale of their bids, are as follows.

(Operation will begin between the years 2000 and 2004)
(Unit:10,000kW)

 40

Bids called for 2,855,000kW, spread over five years, account for 10 percent of power sources developed nationwide over the same period, at approximately 5,600,000kW per year.

3 Activating wholesale wheeling

- Oblige the 9 general power utility electricity firms to organize, the terms of wheeling contract notify MITI of the organization, then publicize aforementioned.
Government may order general power utility to accept wheeling if it unjustifiably rejects wheeling requests by generators.

(2) Establishing a New Scheme for Promoting Entry into Specific Power Distribution Business

(BACKGROUND)
Opportunity for new entry into power distribution business by companies running medium/small power sources (cogeneration, etc.) in the vicinity of consuming area which are capable of supplying electricity in the specific area.

(NEW MEASURES)
- Legislatively define the above-mentioned business.
- New entry must be permitted by government, based on an examination on capability of supply stability.
- Electricity rate must be notified to government. MITI can order corrections of discriminatory supply conditions between consumers.
- Legislate supply obligation clause.

(3) Improving Price Regulation

(BACKGROUND)
The necessity to make the electricity supply more efficient through introducing competition among electric utilities has been increasingly recognized over the post few years. However, most importantly, a stable supply of electricity has been the greatest concern. Facilitating management efficiency of utilities through rate regulation has also been considered in the field of public-utility charges.

(NEW MEASURES)
Based on the background mentioned above, MITI made major reforms in the electricity rate system in 1995. The basic concept of the reforms is that operating efficiency of electric companies should not be promoted by regulation or intervention by the government but by a rate control system which encourages their self-help efforts toward cost-conscious management. Outline of the reforms is as follows :

a) Introduction of Yardstick formula
The yardstick foumula, which urges indirect competition between the 10 electric companies, was introduced in order to promote cost-conscious management of the companies while full-cost principle is retained. Performance indicators are measured in three cost areas : generation, transmission and operating costs. The 10 companies are grouped into three categories, namely group I, II and III, based on their comparative performance. The results of grouping is made public, and companies in group II and III, of which performance is worse, are given cost curtailing assessments. Thus this system provides incentives for power companies to improve their managerial efficiency.

b) Disclosure of annual report on cost-conscious management
In order to encourage voluntary efforts toward cost-conscious management and facilitate customers understanding, electric companies make and publish plans for efficient management every year and assess the results of implementation.

c) Introduction of optional tariffs system
As for optional tariffs, approval was mandatory for contract by agreement under the previous system. From the viewpoint of facilitating load-leveling, approval was replaced by notification to MITI. This deregulation is expected to give customers a wider variety of choices for responding to the diverse needs and thus promote load-leveling.

d) Introduction of fuel-cost adjustment system
By this system, fluctuations in the price of crude oil, LNG and coal as well as exchange rates are reflected automatically in electricity rates. Each company's electricity rates are adjusted every three months based on CIF. However, adjustment will not be made if fuel price falls within 5% range of basic adjusted unit price. A ceiling of adjustment is also set in case of sharp fuel price increases. To implement and reflect the results of these reforms, 10 electric companies applied for reduction of electricity rates to MITI in October 1995. MITI made cost curtailing assessments and approved the reduction of rates in December. Compared to the previous rates the average rate of reduction was 4.21% lower. The new rates have been applied since January 1st 1996.

(4) Rationalizing the Safety Regulations (by Establishing a Self-Responsibility Principle)

<OBJECTIVE>
The modification of the technological standard is aimed at incorporating the perspectives of functional standards and re-examining the regulation system so that the standard can readily meet new, innovative technologies.
Specifically, this entails the re-examination of articles having a lesser need for regulation, the expression of security elements only in functional terms as much as possible, and the adjustment of ASME and others to bring them into compliance with domestic and overseas standards.
The objectives of the modification of the technological standard are to help expand the choice of materials procurement offered to the private sector, boost manufacturers' technological capabilities, and reduce cost by rapidly accommodating technological advancements and establishing/strengthening Japan's standards.

(BACKGROUND)
It is essential to reassess safety regulations recent improvement in operational safety owing to technological progress and growing needs for clearer self-responsibility principle.

(NEW MEASURES)
- Minimize and prioritize government's direct intervention
1 Simplifying multi-stage inspection (prior to operation)
2 Simplifying welding inspection
3 Introducing self-inspection for regular (periodical) inspection
- Introduce new safety regulation framework emphasizing self-responsibility principle by abolishing conventional framework based on government's direct intervention.
- Entrust qualification examinations of chief electricity engineer to private testing organization.

(5) Others
- Individual permit system will be abolished when electricity is supplied to a single building.
- Changes made in electrical facilities will be transferred from the individual permit to the reporting system.
- Simplify the side business regulation on the general power utilities on the condition that they are contributing to the formation of efficient demand structure by promoting the equal distribution of burden.
- To promote the efforts of general utilities aiming to start their "self-wheeling" (i.e. transmission of generated electricity by a self-generator for its own consumption) services,which were liberalized by the revision of the Law,from the spring of 1997.
- To promote the efforts of general power utilities to activate greater use of the competitive bidding system of purchases of electricity by implementing necessary measures such as more publicity of bidding information.

c. Gas

Amendment of the Gas Utility Industry Law (Implemented on March 1, 1995)

1. The need to amend the Gas Utility Industry Law

1) Until 1994, the Gas Utility Industry Law defined service areas for general gas suppliers, and suppliers supplied gas in these areas at authorized rates.
Number of general gas suppliers : 244
Number of customers : 23 million
Percentage of distribution service area : 5 percent of the total land area
(21 percent of urbanized areas)
(all figures are in 1994.)

2) Recent environmental restrictions and technological innovations have fueled demand for city gas by large-volume customers in the industrial and commercial fields (the share of all gas sales rose from 33.7 percent in 1972 to 56.6 in 1994).
Large-volume customers are generally in a position to easily switch to other fuels such as heavy oil and LPG and have the power to negotiate price with gas suppliers. As such, they seek supply and rate setting conditions that are on line with other fuel suppliers. Specifically, they demand the right to negotiate rates and receive supplies outside the service area.
This will require deregulation to promote the customer's benefit and introduce the principle of competition.

3) In the meantime, the need to review safety regulations and further enhance safety has escalated amid such ongoing trends as emphasis on the principle of individual accountability, technological innovation, and expanded gas use modes.

4) Taking into account such developments, the Urban Heat Energy Subcommittee of the Advisory Committee for Energy compiled a report proposing deregulation of gas supply for industrial customers.

2. Outline of the amendment

1) Easing of business regulations concerning gas supply to industrial customers

(1) Ease the current regulations on rate-setting and approve the setting of supply conditions in principle through open negotiation among the concerned parties in the case a general gas supplier supplying city gas to an industrial customer.

(2) Allow general gas suppliers to supply industrial customers outside its service area under certain conditions. In addition, parties other than general gas suppliers should also be able to supply gas to industrial customers under certain conditions.

2) Review of safety regulations

(1) Upgrade safety regulations related to supply to industrial customers

(2) Consign examination work for chief gas engineers to the private sector

(3) Eliminate redundant application of Electric Utility Industry Law and Gas Industry Law of Japan by excluding suppliers covered under the safety regulations of the Electric Utility Industry Law from application of the safety regulations of the Gas Utility Industry Law of Japan.

3) Other matters
Formulate measures to ensure that reserve funds by general gas suppliers set aside reserves as necessary.

Measures accompanying the amendment

(1) The perpetuation of the existing supply conditions to small-volume customers through designated service areas and at the authorized rates would best serve their benefit.

(2) To prevent these deregulatory moves from impeding on the benefit of small-volume customers, industrial and small-volume customers must be clearly demarcated and managed accordingly in the accounting process, and the overall balance of accounts in the large-volume sector must be monitored. In addition, individual cases of supply outside service areas must be investigated to ensure that these do not impede the proper execution of supply obligations inside service areas.

Note : In the immediate future, industrial customers should be defined as customers with an annual contracted supply volume of at least 2 million cubic meters (at a calorific value of 11,000kcal/cm3), in order to assure a smooth transition to the newly introduced system.

(3) Since the amendment will expand opportunities for enterprises in competing energy industries to enter into the gas business, gas transportation service utilizing the gas pipes owned by gas suppliers should be encouraged for those new gas suppliers.

(Reference 1) The Progress of the Deregulation

(as of the end of December 1996)

3-1 Energy-Related Budget

(Unit:100mil.yen)

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