Last Updated July 22, 2019

Law and Practice

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Nagashima Ohno & Tsunematsu is one of the foremost providers of international and commercial legal services based in Tokyo. The firm has over 450 lawyers, including over 30 experienced foreign attorneys from various jurisdictions, and its overseas network includes offices in New York, Singapore, Bangkok, Ho Chi Minh City, Hanoi and Shanghai, and collaborative relationships with prominent local law firms throughout Asia and other regions. The firm regularly advises leading power utilities, trading companies and investors on their energy projects as well as regulatory matters, and financial institutions on financing on those projects. The firm has dealt with a number of renewable power projects since the introduction of the feed-in tariff in Japan. The firm represented Tokyo Electric Power Company Group on establishing an alliance platform with Chubu Electric Power Co, Ltd in the fuel and power business (including the establishment of a joint venture company, JERA).

The Electricity Business Act (Act No 170 of 1964, as amended) governs the electricity business in general.

The structure of the power industry of Japan was formulated during General Headquarters' (GHQ’s) occupation after World War II when nine vertically integrated companies (together with Okinawa Electric Power Company, Incorporated, 'Major Utilities') were incorporated on 1 May 1951 pursuant to a GHQ directive. Each of the nine companies was granted a regional monopoly (in 1972 when Okinawa was returned from the USA, Okinawa Electric Power Company was incorporated and it monopolised the electricity business in Okinawa). The exception to such vertical integration was limited to two wholesale electricity generators, (i) Electric Power Development Co, Ltd. (also known as 'Denpatsu' or, since 2002, 'J-Power'), which was incorporated in 1952 as a State-owned company (with 40% of the shares being held by Major Utilities) to supplement the generation capacity of the nine companies, and (ii) Japan Atomic Power Company, which was incorporated in 1957 to promote the development of nuclear power plants by Major Utilities and J-Power.

The vertical integration and the regional monopoly in the generation sector, the transmission and distribution sector and the retail sector have been gradually relaxed and liberalised since 1995.

With respect to the generation sector, the regime of independent power producers (IPPs) was introduced and the generation and wholesale of electricity was liberalised.

The retail sector was also partially liberalised by way of the introduction of a Power Producer and Supplier (PPS) licence. A PPS can sell its generated electricity to large-volume purchasers (50 kW or more).

As an exception to the regional monopoly of the transmission and distribution sector as well as the vertical integration, a Specified Electricity Business operator licence was established, where a holder of such licence sells its generated electricity to consumers in a very limited geographical area through the transmission and distribution network that it operates and maintains on its own in such area.

In 2003, an electricity wholesale market, Japan Electric Power Exchange (JEPX), was established to provide a liquid market of electricity.

In 2004, J-Power was privatised through being listed on the Tokyo Stock Exchange.

Since 2013, the power industry has been in the middle of a structural reform that consists of (i) establishing a system to efficiently manage electricity generated by power producers in the country across the transmission networks, (ii) full liberalisation of the retail sector and (iii) 'legal unbundling' of the transmission and distribution sector from the generation and retail sector (for more details, please see 1.6 Recent Material Changes in Law or Regulation).

Under the current Electricity Business Act, there are five types of regulated business:

  • Electricity Generation Business (hatsuden jigyo);
  • General Electricity Transmission and Distribution Business (ippan sohaiden jigyo);
  • Electricity Transmission Business (soden jigyo);
  • Specified Electricity Transmission and Distribution Business (tokutei sohaiden jigyo); and
  • Retail Electricity Business (kouri denki jigyo).

The Electricity Generation Business is the business to generate and sell electricity to retail sellers and the Retail Electricity Business is the business to sell electricity to consumers.

With respect to the transmission and distribution sector, the General Electricity Transmission and Distribution Business corresponds to the transmission and distribution segment of the business that each of the Major Utilities or their wholly-owned subsidiaries has conducted since its inception and, even after the structural reform, will be conducted by the wholly-owned subsidiaries of the Major Utilities with a privilege of regional monopoly. The General Electricity Transmission and Distribution Business is not limited to the operation and maintenance of the transmission and distribution network but also carries the responsibility to provide ancillary services such as supply-demand adjustment and frequency control in the region where the transmission and distribution network is maintained.

The Electricity Transmission Business is an exception to non-separation of transmission and distribution and it is the business to transmit electricity to the General Electricity Transmission and Distribution Business operator through the transmission lines that it operates and maintains on its own. Unlike the General Electricity Transmission and Distribution Business, an operator of Electricity Transmission Business is not responsible for providing the ancillary services as described in the previous paragraph. The Specified Transmission and Distribution Business is the business introduced in 1995 as part of liberalisation of the power industry as described above. 

With the exception of more than 50% of the shares in Tokyo Electric Power Company Holdings, Incorporated that are held by the Nuclear Damage Compensation and Decommissioning Facilitation Corporation, a quasi-governmental institution established in response to the Fukushima nuclear incident in 2011, half of whose capital is funded by the government, Major Utilities are investor-owned companies whose stock is listed on a stock exchange in Japan and freely traded in the market.

Generation

As of the end of April 2019, there are 763 Electricity Generation Business licence-holders.

The principal Electricity Generation Business Operators are Major Utilities or their wholly-owned subsidiaries (JERA Co., Inc.; Tokyo Electric Power Company Holdings, Incorporated; Chubu Electric Power Company, Incorporated; The Kansai Electric Power Company, Incorporated; Tohoku Electric Power Company, Incorporated; Kyushu Electric Power Company, Incorporated; The Chugoku Electric Power Company, Incorporated; Hokkaido Electric Power Company, Incorporated; Hokuriku Electric Power Company, Incorporated; Shikoku Electric Power Company, Incorporated; and The Okinawa Electric Power Company, Incorporated) and J-Power.

Transmission and Distribution

As of the end of April 2019, there are ten General Electricity Transmission and Distribution Business licence-holders, three Electricity Transmission Business licence-holders and 31 Specified Electricity Transmission and Distribution Business licence-holders. 

The main transmission and/or distribution network operators are Major Utilities or their wholly-owned subsidiaries (TEPCO Power Grid, Incorporated; The Kansai Electric Power Company, Incorporated; Chubu Electric Power Company, Incorporated; Tohoku Electric Power Company, Incorporated; Kyushu Electric Power Company, Incorporated; The Chugoku Electric Power Company, Incorporated; Hokkaido Electric Power Company, Incorporated; Shikoku Electric Power Company, Incorporated; Hokuriku Electric Power Company, Incorporated; and The Okinawa Electric Power Company, Incorporated) and J-Power.

Retail

Since 1995, the Retail Electricity Business has been gradually liberalised. After full liberalisation of the retail electricity market in 2016, the number of licence-holders of Retail Electricity Business has grown significantly from 57 in August 2015 to 588 in May 2019. Although most of them are investor-owned companies, there are some retail electricity suppliers owned by municipal governments.

The main retail electricity suppliers are Major Utilities or their wholly-owned subsidiaries (TEPCO Energy Partner, Incorporated; The Kansai Electric Power Company, Incorporated; Chubu Electric Power Company, Incorporated; Tohoku Electric Power Company, Incorporated; Kyushu Electric Power Company, Incorporated; The Chugoku Electric Power Company, Incorporated; Hokkaido Electric Power Company, Incorporated; Shikoku Electric Power Company, Incorporated; Hokuriku Electric Power Company, Incorporated; and The Okinawa Electric Power Company, Incorporated) and ENNET Corporation.

It is noted that those principal retail electricity suppliers (except for ENNET Corporation) occupy a dominant share of electricity supply. As of February 2019, the sales share of the electricity supplied by other retail suppliers (including ENNET Corporation) is approximately 14.6%.

The Electricity Business Act  (as of 1 October 2017 and further amendments are not reflected) does not provide any nationality requirement on a licence of electricity business or any restriction with respect to foreigners holding a share in an operator of an electricity business.

Under the Foreign Exchange and Foreign Trade Act (Act No 228 of 1949, as amended), however, a foreign investor may not invest in an unlisted power company or own 10% or more of the shares of a listed power company unless he makes an ex ante notification and the required waiting period elapses. In principle, the length of the waiting period is 30 days, but it may be shortened to two weeks or extended up to five months, at the discretion of the government.

In the meantime, the waiting period is shortened to five business days if an investment falls within one of the following categories:

  • to incorporate a wholly-owned subsidiary in Japan or acquire equity in or debt of such subsidiary, or to open a branch in Japan ('greenfield investment');
  • to acquire additional equity in a Japanese company without changing its shareholding therein and with no change in the management structure thereof, within six months from the most recent acquisition of equity therein for which the ex ante notification was made ('rollover investment'); and
  • to acquire equity in or debt of a Japanese company as a passive investor having no voting right on material management matters ('passive investment').

In reality, approximately 90% of ex ante notifications made in 2015 with respect to investments over which the Ministry of Economy, Trade and Industry (METI) holds jurisdiction (including investments in the energy sector) fell into one of those three categories and thus were cleared within five business days.

If, during the waiting period, the Ministry of Finance (MOF) or METI has decided that the investment may undermine national security, public order, or public safety, or adversely affect the national economy, MOF and METI may issue a warning to change the terms of, or surrender, the investment, and if the investor does not respond to the warning or expresses his intention to disobey the warning, MOF and METI may issue an order to change the terms of, or surrender, the investment.

At the time of writing, the only precedents are the warning to surrender investment and the order to surrender investment, each of which was issued in 2008 against the Children’s Investment Fund, which intended to increase its shareholding in J-Power from 9.9% to 20% by acquiring additional shares.

The Electricity Business Act regulates (i) the sale of a whole business, (ii) an amalgamation and merger, and (iii) a corporate split (collectively, 'Business Transfer'), which may be made by an operator of electricity business.

Under the Electricity Business Act, an operator of (i) Electricity Generation Business, (ii) Specified Electricity Transmission and Distribution Business or (iii) Electricity Retail Business may implement a Business Transfer at its own discretion, while an operator of (i) General Electricity Transmission and Distribution Business or (ii) Electricity Transmission Business may not implement a Business Transfer without the approval of METI, failing which, the Business Transfer will not take effect.

Further, the Electricity Business Act requires an operator of (i) General Electricity Transmission and Distribution Business or (ii) Electricity Transmission Business to make an ex ante notification to METI if it sells or disposes of the facility employed for its business. If METI considers that such sale or disposition adversely affects the operation of its business, METI may issue an order to change the terms of or surrender such sale or disposition.

A person who has acquired facilities used for electricity business must submit an ex post facto notification to METI under the Electricity Business Act.

The Act on the Regulation of Nuclear Source Material, Nuclear Fuel Material and Reactors (Act No 166 of 1957, as amended) provides that an operator of a nuclear plant may not implement (i) amalgamation and merger or (ii) corporate split without the approval of the Nuclear Regulation Authority (NRA). In addition, a person who intends to acquire a nuclear power plant must obtain the permission of the NRA before the transfer.

More generally, under the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (Act No 54 of 1947, as amended), if merger, amalgamation, company split or transfer of business substantially restrains competition in a particular field of trade, the Japanese Fair Trade Commission (JFTC) may issue an order to forbid such actions or to change the terms of such actions.

http://www.nsr.go.jp/data/000067232.pdf (as of 1 March 2014 and further amendments are not reflected)

http://www.japaneselawtranslation.go.jp/law/detail/?ft=2&re=2&dn=1&yo=%E7%8B%AC%E5%8D%A0%E7%A6%81%E6%AD%A2&ia=03&ph=&x=0&y=0&ky=&page=2 (as of 1 April 2015 and further amendments are not reflected)

The ministry responsible for energy policy is METI, and the Agency for Natural Resources and Energy (ANRE), an institution under METI, is in charge of proposing an energy policy and implementing the energy policy adopted by the government. In particular, ANRE is given an independent authority to promulgate rules to implement the energy policy of the government. As such, except for safety regulations, most of the regulatory matters of the electricity industry are delegated to ANRE.

As a part of the structural reform of the electricity industry since 2013, the Organisation for Cross-regional Co-ordination of Transmission Operators (OCCTO) was established in 2015. OCCTO is not a State-owned organisation and all licensed operators of electricity business are required to join OCCTO, which has the power to give directions to operators in order to achieve its missions.

The essential mission of OCCTO is to co-ordinate the transmission networks in the country in accordance with the Network Codes (which is approved by METI), so that those transmission networks may function as an integrated network and be operated, maintained and developed in a consistent manner. The Network Codes are OCCTO’s executive rules on how OCCTO executes its network operations (including the procedure required by a network user in relation to accessing the transmission and distribution networks). All electricity business operators, as members of OCCTO, are required to operate their business in accordance with the Network Codes.

Before, the demand and supply of electricity was monitored at a transmission network level by each of the Major Utilities that had been granted exclusivity as sole licensed operator in a certain geographical area. The Electricity Power System Council of Japan (ESCJ) was established in 2004 to support co-ordination between Major Utilities from 2005. OCCTO was established to strengthen the control of the demand and supply of electricity nationwide as a successor of ESCJ. OCCTO is expected to enhance efficiency in the use of the transmission networks by way of monitoring the demand and supply of electricity at a country level and giving directions to operators.

The Electricity and Gas Market Surveillance Commission (EGC) was established on 1 September 2015, half a year before the electricity retail market was fully liberalised on 1 April 2016 (the gas retail business was liberalised one year later, on 1 April 2017). EGC’s primary missions are to monitor the energy market and propose better regulations to promote competition (based on the information it acquires through monitoring activities and the analysis thereof).

In order to achieve its missions, EGC, as a council to METI, has the power to issue a warning to operators of electricity business and to propose solutions to METI. As an exercise of that power, EGC detects improper trades through daily market surveillance; examines and reviews the rate of transmission and distribution tariffs, and regulated retail tariffs set by Major Utilities; and proposes regulations that it thinks are appropriate in order to promote competition or protect consumers.

https://www.occto.or.jp/en/about_occto/articles/files/Network_Codes_1810.pdf (amendments of 2019 are not reflected)

As described in 1.1 Principal Laws Governing the Structure and Ownership of the Power Industry, the vertical integration and the regional monopoly in the generation sector and the retail sector have been gradually relaxed and liberalised since 1995.

At the time of writing, the electricity industry is in the middle of structural reform that consists of (i) establishing a system to efficiently manage electricity generated by power producers in the country across the transmission networks, (ii) full liberalisation of the retail sector and (iii) a 'legal unbundling' of the transmission and distribution sector from the generation and retail sector.

OCCTO was established in 2015 and the retail sector was fully liberalised in 2016, accordingly. With respect to the liberalisation, however, as Major Utilities and their affiliates have a dominant share in the market, their existing basic retail tariffs of electricity have been regulated in order to secure fair competition with other retailers, which regulations are expected to be lifted some time after 2020 (when the 'legal unbundling' occurs) when the government views that a sound competitive market has been established.

The last piece of the ongoing structural reform, the 'legal unbundling', will come into effect on 1 April 2020. Under the legal unbundling, an operator of the General Transmission and Distribution Business (ie, Major Utilities except for Okinawa Electric Power Company, Incorporated, in the Okinawa region) is not allowed to operate Electricity Generation Business (if it is considering supplying electricity for retailers or consumers) or Retail Electricity Business (except for such business in certain isolated islands) and is required to create a separate entity if it also wants to operate such businesses within its group. It aims to secure the impartiality of the Major Utilities as operators of transmission and distribution networks so that every electricity retailer and electricity generator may be given equal access to their networks under fair and equal conditions. In order to achieve the goal, as a supplement of a separate entity requirement, new regulations would be promulgated that require a firewall arrangement and other measures to prevent the transmission and distribution network operators from exercising influence on the operations of their affiliate retailers and/or generators. Please see 5.1.3 Terms and Conditions Imposed in Approvals to Construct and Operate Transmission Facilities.

In addition, the capacity market, where the value of generation capacity in 2024 and subsequent years will be auctioned and traded, will start to operate in 2020. 

As the vertically integrated Major Utilities were granted regional monopoly for nearly 50 years, an electricity retailer that is a Major Utility or its affiliate occupies a dominant share in the geographical area where such Major Utility or its parent Major Utility enjoyed the regional monopoly.

As such, since the retail sector’s liberalisation began to be discussed, the question of how to secure an environment where new entrant electricity retailers can compete with Major Utility retailers has been an important item on the agenda. Among the unique aspects of Japan’s power industry is that while the government establishes regulations that it thinks appropriate to address that issue, it also requires the Major Utilities to develop and implement voluntary solutions to support new entrant retailers through private-sector autonomy. An example of such autonomous solution is that Major Utilities voluntarily commit themselves in supplying their surplus electricity to JEPX at marginal costs.

Other characteristics of Japan’s power industry include the following: (i) the transmission sector and the distribution sector are not distinguished for a regulatory purpose under the Electricity Business Act and those are covered by a single licence (except for Electricity Transmission Business), and (ii) there is no interconnection with other countries, which means that the demand of electricity has to be satisfied by the electricity generated by power generation facilities in Japan.

Nagashima Ohno & Tsunematsu

JP Tower
2-7-2 Marunouchi
Chiyoda-ku
Tokyo
Japan
100-7036

+81 3 6889 7000

+81 3 6889 8000

info@noandt.com www.noandt.com
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Authors



Nagashima Ohno & Tsunematsu is one of the foremost providers of international and commercial legal services based in Tokyo. The firm has over 450 lawyers, including over 30 experienced foreign attorneys from various jurisdictions, and its overseas network includes offices in New York, Singapore, Bangkok, Ho Chi Minh City, Hanoi and Shanghai, and collaborative relationships with prominent local law firms throughout Asia and other regions. The firm regularly advises leading power utilities, trading companies and investors on their energy projects as well as regulatory matters, and financial institutions on financing on those projects. The firm has dealt with a number of renewable power projects since the introduction of the feed-in tariff in Japan. The firm represented Tokyo Electric Power Company Group on establishing an alliance platform with Chubu Electric Power Co, Ltd in the fuel and power business (including the establishment of a joint venture company, JERA).

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