Liberalizing Electricity Markets and Divided Competition Authority: A Comparative look at Japanese and British Competition Laws

Alexandra Plutshack, Vol. 36 Associate Editor

Electricity systems have traditionally always been operated as publically owned monopolies. Over the last few decades several nations have begun liberalizing reforms of the electricity market, opening up markets for both generation and retail. However, given the nature and history of the industry, there is concern that current competition laws may not be capable of breaking up the natural “monopolistic inertia” electric companies enjoy. This past June, the Japanese Diet enacted legislation aimed at liberalizing the electricity retail market, ending the monopoly of regional power companies.[i] The new laws, in force starting 2016, are just the latest in a three-stage reform of Japan’s electricity market. [ii]  While these plans look optimistic, it has yet to be seen whether such reforms will be successful in ending the market power these regional companies have. A major tool for liberalization is the robust enforcement of competition laws, and some question has been raised as to whether the current antimonopoly regime will be adequate. In Japan, implementation of competition law for the electric power industry is delegated to two agencies: the Fair Trade Commission (FTC) and the Ministry of Economy, Trade and Industry (METI).[iii] The first is the agency responsible for implementing the Antimonopoly Act and enforcing proscriptions on unfair competition. The latter is responsible for implementation Electricity Business Act (EBA), the initial act liberalizing retail supply.[iv] While this gives METI wide spread regulatory and enforcement power as it relates to the EBA, it is up to the FTC to investigate and challenge anticompetitive behavior.[v] This division of authority may reduce the efficacy of the liberalization. Foremost among the issues is transmission. Pre-liberalization, the electrical supply was controlled on a regional basis, with each region using the service of a single power company. While retail or generation of electricity can conceivably be competitive, the inefficiency of having multiple power grids means this is not a viable option for transmission. As a result, these regional power companies, which now compete nationwide, nevertheless have sole control over their region’s transmission infrastructure.[vi] This transmission is regulated by the METI, and as a result there is little room for the FTC to investigate under the Antimonopoly Act.[vii] Thus, while METI has taken regulatory measures to prevent regional incumbents from using exclusionary transmission tariffs. However because of this division of authority the FTC is prevented from using the full force of the Antimonopoly Act and there is concerns that without this enforcement mechanism, transmission monopolies will bolster monopolistic inertia in the retail and generation markets. The FTC is not without authority in ensuring electricity competition, however. For example, they have pursued investigations under the Antimonopoly Act for regional companies entering to excessively long-term contracts, thus preventing the entrance of private energy retailers.  An example of this is FTC cautioning Hokkaido Electric Power for charging too high of a penalty for customers terminating a contract.[viii]However the separation of the two authorities has forced the FTC to pursue ex post solutions which may have been more appropriately addressed through ex ante regulation in conjunction with METI. Similar issues face the United Kingdom, which has already undergone a similar series of reforms, but they have adopted a very different approach to enforcement of their competition laws. The UK began a liberalizing reform in the 1990s and has recently implemented the EU Third Energy Package.[ix] Like Japan, the United Kingdom has two agencies enforcing competition laws in the electricity market. The first is the general Competition and Markets Authority (CMA), responsible for investigating all alleged violations of the Competition Act of 1998. The second is the section regulator, the Office of Gas and Electricity Markets (Ofgem). However, unlike in Japan, these two agencies are granted “concurrent authority” over investigating and enforcing competition laws.[x] Furthermore, unlike Japan, the transmission grid in the UK is operated by a single, tightly regulated, system operator.[xi] Advocates of “concurrent authority” argue that Ofgem’s specialist expertise makes them more efficient in investigating anticompetitive behavior. Furthermore it allows the coordination of ex ante regulation and ex post competition law. The background threat of formal investigation and charge can be used to encourage compliance with agency regulations.[xii] Despite worries that the agency would rely too heavily on adjudication, Ofgem has continued to focus largely on licensing and regulation. For example, in 2008, Ofgem began investigation of Scottish Power Limited and Scottish and Southern Energy plc. However, when the investigation began to intensify Ofgem decided that the chance of success under the competition law was unlikely and that the issue could be more efficiently addressed through regulatory mechanisms.[xiii] Given the difficulty in applying standard competition law in the cases of liberalizing markets, countries should be very careful in how they chose to enforce these laws. Due to monopolistic history the electricity sector, enforcement of competition laws may be inadequate unless properly coordinated with extensive regulatory reform. Japan’s current division of authority creates a system that disincentivizes coordination between agencies, which could leave open a lot of room of anticompetitive action. A system that grants sector regulators concurrent authority to investigate violations, as the UK has adopted, may help Japan in tackling this problem. Such a system could be particularly useful in dealing with the problem of transmission systems and their contribution to monopolistic inertia.

[i] Liberalizing the Power Market, The Japan Times, Sep. 19 2014, http://www.japantimes.co.jp/opinion/2014/09/19/editorials/liberalizing-the-power-market.