The Kansai Electric Power Company, Inc

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The Kansai Electric Power Company, Inc.

3-22 Nakanoshima 3-chome
Kita-ku
Osaka 530-8270
Japan
Telephone: (+06) 6441-8821
Fax: (+06) 6447-7174
Web site: http://www.kepco.co.jp

Public Company
Incorporated: 1951
Employees: 35,554
Sales: $21.8 billion (2003)
Stock Exchanges: Tokyo Osaka Nagoya
Ticker Symbol: 9503
NAIC: 221110 Hydroelectric Power Generation; 221112 Fossil Fuel Electric Power Generation; 221113 Nuclear Electric Power Generation; 221119 Other Electric Power Generation; 221122 Electric Power Distribution

The Kansai Electric Power Company, Inc. operates as one of Japan's ten regional power companies supplying electricity to over 13 million customers in the Kansai region. The company services the central part of the main island of the Japanese archipelago, covering an area of 28,643 square kilometers—about 8 percent of the nation's total land mass. It includes the three major cities of Osaka, Kyoto, and Kobe as well as the industrial region along the coast of Osaka. Relatively small in land area, Kansai accounts for nearly 16 percent of the nation's gross domestic product. As of March 2003, Kansai Electric's generating capacity was 35,434 megawatts (mW), which included its thermal, nuclear, and hydro-generating operations. Japan partially deregulated its retail electric power sector in March 2000, leaving the company's market open to competition. As such, Kansai Electric is focused on strengthening its core operations while branching out into new business areas.

Early History

Kansai Electric was formed as a company on May 1, 1951, when the General Headquarters of the Allied Powers (GHQ) under General MacArthur approved a plan submitted by the Japanese government to reorganize and rationalize the electrical power industry. Under the scheme, which was developed in 1948, the nation was divided into nine blocks, each with its own privately owned electric power company (EPC). In 1972, the Okinawa EPC was added as a tenth company.

Although immediately after World War II there was a sharp decrease in demand for electricity, since the bulk of electricity prior to this had been allocated to munitions production, the speed of reconstruction gathered pace so quickly that by the time of its inauguration the most pressing need for Kansai Electric was to build up its generating capacity to meet a critical power shortage. Despite booming demand, however, national pricing policies kept electricity rates so low that even costs could not be covered. Over the next three years, therefore, three rates reviews were allowed. In 1951, the average rates of the EPCs rose by 30 percent; in 1952, they rose by 28 percent; in 1954, they rose by 11 percent. In July 1952, the Electric Power Development Promotion Law was enacted to further the construction of generating plants and transmission and transformation facilities. The law created the Electric Power Development Coordination Council under the prime minister's office, which enabled the Electric Power Development Co. Ltd. (EPDC)—a government-owned corporation which could use government funds to promote power generation and transmission development—to begin operations in September 1952 using authorized capital totaling ¥100 billion.

With its share of this money, and with its financial situation improved by the three rates reviews, Kansai Electric was able to commence construction of the 125mW Maruyama hydroelectric power plant, which was then the largest in Japan and which pioneered large-scale hydroelectric power development. In 1954, with the completion of the Maruyama hydroelectric power plant, the power supply situation began to stabilize, and the shortage was gradually met.

In 1956, the company began the Kurobegawa No. 4 hydroelectric power project, an unprecedentedly arduous and large-scale civil engineering undertaking. Kurobegawa No. 4 was finally completed in 1963. However, from the mid-1950s, hydroelectric power had begun to take a back seat to thermal power in Japan. This was due to four major factors: 1) most of the good sites for hydroelectric power generation had already been developed; 2) rapid progress in thermal power technology had improved efficiency and made large-scale plants possible; 3) thermal construction costs per kilowatt (KW) had fallen; 4) fossil fuel costs were lower. Following this trend, in the mid-1950s Kansai Electric began replacing its worn-out fossil-fired generating capacity by constructing new high-performance plants using the latest technology from the United States. The first such plant was Tanagawa, with two units of 75mW. With the completion of Osaka Unit No. 1, by 1959 the system's total fossil-fired generating capacity had exceeded its total hydro-generating capacity.

Although all through the period of high economic growth in Japan—1961 to 1973—oil remained the principal source of electrical energy, accounting for 43 percent of fuels used for generation by the EPCs in 1963 and 87 percent in 1973, it was in 1954 that the first inroads into research and development on nuclear power were made. Albeit not without hindrances, this was a trend which was to develop substantially over the next four decades.

The 1950s had seen a general settling into the new system for the EPCs in Japan. This had been encouraged in part by the establishment of various regulatory bodies. The Public Utility Bureau, established in 1952, took the place of the abolished Public Utilities Commission as part of the Ministry of International Trade and Industry (MITI). The Federation of Electric Power Workers Unions was formed in May 1954 in response to labor disputes that had led to blackouts and serious disruptions of industry in the early 1950s. It was also part of an attempt to reconcile labor with the Law for the Regulation of Strike Activities in Electric Utility and Coal Industries, enacted in August 1953, which prohibited strikes that interrupted service. The Research Committee on Electricity Rate System was created in December 1957 in order to examine the existing rates and adjust them, through MITI, to a level more in line with actual conditions. The Japan Electric Power Information Center, Inc. was created in May 1958 to encourage the free flow of information within the industry on an international basis.

Impressive Growth in the 1960s

The 1960s saw the development of the electric power industry in Japan on an impressive scale. With many of its initial problems ironed out in the 1950s, flourishing industry and rising living standards led to an ever-booming market for the EPCs during the 1960s and a chance to build on the foundations they had already laid.

Between 1961 and 1973, Japan's EPCs experienced an average annual increase in demand of 10.7 percent. This was due not only to Japan's booming economy but also to technological advances made by the industry during the period. Fossil fuel was the chief generator of energy in this period, and technological advancement in this area was impressive. Innovation in this area was also encouraged by the low price of oil. Crude oil, which cost $2.30 per barrel in 1960, went down to as little as $1.80 in 1971. Conversely, with improved technology, steam pressure increased from 60 kilograms per square centimeter (kg/cm2) to 246kg/cm2. Steam temperature went from 450C to 566C, and unit generating capacity from 53mW to 600mW. Heat efficiency also went up from 32 percent to 38 percent. As experience was gained in constructing these new super-plants, costs were cut and capacity per unit was increased. Also, the introduction of computers made possible the rationalization of personnel.

Fuel was also switched, initially from coal to heavy oil, and then from heavy to crude oil, which was more cost-efficient as well as more environmentally friendly. Also with a view to pollution problems, plants fired by liquified natural gas (LNG) began to be introduced in an effort to reduce sulfur emissions as well as to remove dependence on oil, all of which had to be imported. Tokyo Electric took the lead in this area from 1963 to 1973, and from 1964 to 1971 Kansai Electric commissioned two LNG/oil-fired plants, one at Himeji 2 and one at Sakaiko.

In December 1966, the company started to construct its first nuclear power plant, Mihama Unit No. 1—rated at 340mW—which employed a pressurized water reactor imported from the United States. In August 1970, the first nuclear-generated power from the unit was sent to the site of the EXPO '70 exhibition of industry, technology, and commerce held in Osaka. The unit itself was completed in November 1970.

Technological advances in transmission and distribution were also made during this period. Building on foundations laid in the mid-1950s, in 1960 Kansai Electric and Chubu Electric linked up utilities with Tokyo and Tohoku Electric Power companies. In 1962, Kansai Electric commissioned an Economic Load Dispatching System. This led to the starting of an automatic load dispatching operation in 1968, which made possible centralized control of unmanned hydroelectric power plants and substations. In 1964, Kansai Electric launched a campaign to provide a more reliable service to customers. In 1967, a Technical Research Center was established to strengthen the organization's research and development.

Thicker cables, adoption of multiconductors, allowing pylons to carry more than one transmission line, and improved pylons helped with the linking of systems. In addition, after Tokyo Electric boosted its Boso line in the Chiba prefecture to 500 kilovolts (kV), Kansai Electric completed its first 500kV trunkline, the Wakasa Line, in 1969. In 1970, the company's first large-scale pumped storage hydro plant, Kisenyama (466mW), was completed.

Company Perspectives:

To achieve the company's sustainable growth in the current era, when the electric power industry is undergoing major transformations precipitated by deregulatory initiatives, we pledge to devote our full resources to the creation of optimum value for our customers and further fortification of our management base. We will create value for our customers not only through the development of enhanced services and rate schedules in our electricity operations, but also by mustering the comprehensive resources of our group network, which encompasses a broad palette of operations, including gas provision, amenities meeting life cycle needs, and IT services.

Dealing With Environmental Concerns

However, industrial development was to take its toll on the Japanese environment. The problem was particularly severe in comparison to other countries, and the electric power industry was involved. As the use of oil increased in the effort to meet demand for electricity, sulfur oxide emissions rose, causing bronchial problems and noise pollution. In the face of mounting public anger in the second half of the 1960s, the EPCs, along with other industrial sectors, began to take steps toward pollution control. These included the desulfurization of crude oil, a shift to the use of crude oil and LNG, using higher chimneys, and efforts to reduce particle emissions.

After years of hedging the issue owing to its links with the industrial sector, the government was eventually moved to tackle the problem, and a number of pollution control laws were finally forced through the Diet, Japan's parliamentary branch of government. These included in 1967 the Basic Law for Environmental Pollution Control, and in 1968 the Air Pollution Control Law and Noise Control Law. In 1970, the Diet made these laws more stringent and added the Water Pollution Control Law so that now the electric power stations acted under a strict set of pollution regulations. The result of this was that by the mid-1970s Japan had begun to lead the world in terms of pollution control. Also during this period, in 1966, owing to the rapid increase of the use of air-conditioning units, system peak demand changed from winter to summer.

In the 1970s, after enjoying a boom for many years, the electric power industry in Japan was plunged into an acute slump. The major reason for this was the fourth Middle East conflict, which broke out in autumn 1973, upsetting the world oil market. Two sharp increases in the price of oil ensued, in 1973–74 and in 1978–79, which profoundly changed the shape of the Japanese economy. Since oil was the prime source of fuel for electricity generation up until the first oil shock, accounting for 87 percent of fuels used, the electric power industry was hit particularly hard by the steep price increases. Kansai Electric was forced to revise its electricity rates in 1974 for the first time in 19 years, so that between 1970 and 1980 the price per unit of electric power for Kansai rose from ¥4.74 to ¥19.58 per kilowatt-hour.

The oil crises led to two main changes in the Japanese economy which affected the electricity industry directly. First, demand for electricity within the industrial sector nosedived as higher energy costs forced smokestack industries out of business and encouraged a shift to high technology and service sectors. Energy conservation measures also contributed to declining demand.

Second, owing to increases in the price of oil, the EPCs were forced to seek alternative fuels for generation. Between 1973 and 1975, the percentage of oil-fired thermal generation was virtually halved in terms of total generation. The shortfall was made up largely by nuclear generation and liquefied natural gas.

In 1974, 1976, and 1980, the EPCs sought major rate increases to counteract the soaring price of oil. After the third increase in 1980, the cost of electricity was 3.5 times higher than it had been before the first oil shock. The average rise on each occasion was 56.8 percent in 1974, 23.1 percent in 1976, and 52 percent in 1980.

By 1977, because of these hikes, and also because of the rising value of the yen, the EPCs' profits began to improve again. In 1977, Kansai Electric's sales were 23.2 percent higher than in the previous year, and post-tax profits were 21.3 percent higher. Originally, the EPCs had marked out new rate increase margins far in excess of those actually enforced, in anticipation of a 5 percent increase in the price of crude oil and fuel oil in 1976.

Judging that no oil markup would take place, however, MITI cut down the original proposals. In approving the increases, MITI also set the value of the yen against the dollar at ¥299/ $1.00, which was important to the EPCs as they procured all of their oil supplies from abroad. The yen subsequently continued to rise, reaching ¥272 against the dollar in the second half of 1977. In six months, the foreign exchange gains of Kansai Electric rose by ¥10 billion. Operation costs during the same period increased by ¥5 billion.

Thus, despite further oil price hikes by the Organization of Petroleum Exporting Companies (OPEC) in 1979, leading to the 1980 rate hike, the EPCs did not fare as badly as they might have done, or indeed as they seem to have expected, partly due to the rising value of the yen. With decreases in the price of oil beginning in late 1985, the companies temporarily and tentatively cut their rates—in 1986 for seven months and in 1987 for one year. In 1988, MITI approved a further cut, bringing the average reduction in rates for the industrial and residential sectors of the EPCs to about 17 percent.

The Development of Nuclear Power Leads to Problems

Because of its heavy dependence on imported oil, and because of the two oil shocks, Japan developed nuclear and other alternative energy sources. Nuclear power assumed an important position in Japan's energy policy.

Key Dates:

1951:: Kansai Electric Power Co. Inc. is established.
1963:: The Kurobegawa No. 4 hydroelectric power facility is completed.
1969:: Kansai Electric completes the Wakasa Line, its first 500kV trunkline.
1970:: The company's first nuclear plant, Mihama Unit No. 1, begins operation.
1984:: Kansai Electric is awarded the prestigious Demming Prize by the Association of Quality Control in the United States and Japan.
1991:: Unit No. 2 at the Mihama plant is shut down after a problem with a steam generator.
1995:: Japan partially liberalizes its electricity market.
2000:: Deregulation begins in the retail sector of Japan's electric power industry.

Kansai Electric started its research and study of nuclear power in the 1950s and completed its first nuclear reactor in 1970. At one time, the company owned and operated nine reactors, with nuclear plants making up just over a quarter of its capacity and about 45 percent of its power needs. The development of nuclear power, however, was challenging.

A total of 36 legislative acts and 66 different legal procedures were required before construction of a nuclear-power plant could proceed. The process could take 7 to 15 years from the announcement of construction to the start of operation. Approval for construction was granted by the Electric Power Development Adjustment Council, which was chaired by the prime minister. After approval, the plan was then subjected to strict examinations by the Nuclear Safety Commission. After the government procedure, two public hearings needed be held to reflect the interests of local residents. These hearings were sponsored by MITI. The system was established in 1978.

Another problem with nuclear power generation was the non-nuclear proliferation policy followed by the United States. Following this policy, nations buying nuclear fuel from the United States needed to get case-by-case U.S. government permission to reprocess spent uranium. In 1988, the U.S. Congress refused to ratify a Japanese-U.S. nuclear cooperation agreement signed by Tokyo and Washington in November 1987, which would have allowed Japan to reprocess spent fuel for a 30-year period.

Especially in the early 1980s, in the light of President Ronald Reagan's massive arms build-up, demonstrations against the use of nuclear power were widespread in Japan. In 1980, the venue for the public hearings regarding Kansai Electric's plans to build the No. 3 and No. 4 reactors at Takahama were surrounded by demonstrators.

Public outcry was exacerbated and construction of nuclear reactors was further set back by a number of accidents around the world in the late 1970s, the 1980s, and the early 1990s. Repercussions of the Three Mile Island accident in the United States in March 1979 were keenly felt in Japan, resulting in the suspension for one year of all plans to build nuclear power plants. This delayed the construction of Kansai's 3 and 4 reactors at Takahama for a year and partly accounted for the public demonstrations when the hearings eventually began. Public confidence in nuclear power was not improved by the leaking of nuclear waste at Tsuruga nuclear plant, which was intentionally left unannounced by the Japan Atomic Power Co. The Chernobyl accident in the Soviet Union again shook public confidence. However, it should be noted that Japan developed technology to prevent accidents due to tubing stress corrosion and steam generator tubing pit holing. Although accident prevention was extremely expensive, the EPCs had no alternative but to follow a safety-first nuclear program because of public concern.

Accidents still happened in Japan, however, and in February 1991 Unit No. 2 at Kansai Electric's Mihama plant had to be closed down after a problem with a steam generator led to a leak of radioactive steam. This incident indicated that despite a waning of public opposition to nuclear fuel in the light of global warming, and despite the safety measures followed by the EPCs, nuclear power generation was still unlikely to be free of problems for the foreseeable future.

Partly as a response to environmental pollution, several non-nuclear alternatives to oil had been developed by the EPCs since 1970, when Tokyo Electric opened the world's first LNG-fired plant at Minami-Yokohama. During the early 1990s, a little less than one-fifth of Kansai Electric's capacity was LNG-fired, or LPG (liquified petroleum gas)-fired, accounting for about 25 percent of thermal power generation.

In 1984, partly due to an industrial move into a high-technology environment and partly in order to exploit their utilities more fully, the EPCs began diversifying into the telecommunications business. While this was to remain a peripheral aspect of the industry, the EPCs became major rivals of NTT (Nippon Telegraph and Telephone Ltd.). At this time Kansai Electric planned to continue its exploitation of the telecommunications industry, as well as launching into cogeneration and other local heat supply business.

Continuing its diversification, as well as contributing to various regional projects such as the construction of the 24-hour Kansai International Airport in Osaka Bay and the Kansai Science and Research Park, Kansai Electric was producing new businesses that were being incorporated as the company's subsidiaries and affiliates. As of March 1991, the company had a direct equity participation of 20 percent or more in 40 corporations.

In 1984, Kansai Electric was awarded the prestigious Demming Prize by the Association of Quality Control in the United States and Japan for the performance of its Total (companywide) Quality Control program. Kansai Electric was the first EPC ever to be awarded the prize and the company intended to develop its quality improvement activities further.

Since the first oil crisis, the EPCs had been developing power-saving electrical devices. Paradoxically, this development led to a boost in demand for power. Kansai Electric expected a continued rise in demand for electricity and so continued to construct generating plants.

Kansai Electric continued to take an interest in environmental issues and in April 1991 organized a Global Environment Project Development Conference, chaired by the president of the company. The conference adopted a four-point plan to continue tackling the environmental issue and also made some headway in the field of reducing emissions from thermal-fired plants.

In the early 1990s, the breakdown of the company's energy sources was as follows: nuclear—7,408mW (24 percent); oilfired—11,519mW (37 percent); LNG-fired—6,062mW (19 percent); combustion turbines—360mW (1 percent); conventional hydro—3,109mW (10 percent); and pumped storage hydro—2,920mW (9 percent). Its long-range plan, "Kansai Electric Power in the Year 2030," released in 1988, envisaged a generating capacity mix of 40 percent nuclear, 33 percent oil and LNG, 18 percent hydro, and 9 percent coal.

Facing Deregulation: 1990s and Beyond

Kansai Electric entered a new era of challenges in the years leading up to the new century due to the liberalization in Japan's energy sectors. Indeed, by the mid-1990s the electricity industry in Japan was undergoing significant change. In 1995, adjustments to the Electricity Utilities Industry Law allowed competition to enter into the electricity generation and supply market. Then, in 1996, a wholesale electric power bidding system enabled non-electric power companies to sell electricity to electric power companies. Finally, in March 2000, the retail sale of electricity was partially deregulated, allowing large-lot customers—those demanding large amounts of electricity—to choose their power supplier. Nearly 30 percent of Kansai Electric's total sales volume came from this type of customer.

One of the goals of deregulation was to foster competition, which in turn would lower the electricity costs in the country. The deregulation was slow to change the Japanese industry, however, and during 2001 Kansai Electric and the nine other regional companies still controlled 99 percent of the market. In fact, only six Japanese-based companies—other than the original ten—supplied power to large customers, including retail stores and office buildings. This accounted for a .2 percent share of the overall market.

Despite the apparent slow arrival of competition, Kansai Electric made changes to its business strategy in response to deregulation. In 1998, for example, the company became the first Japanese power concern to become involved in an overseas venture when it acquired a 7.5 percent interest in a hydraulic power facility project in the Philippines. Kansai Electric established a new subsidiary to oversee its expansion in foreign markets. In 2001, the company announced its entrance into the retail gas market, becoming Japan's second EPC to land a contract to supply gas directly to retail customers.

During Japan's deregulation process, the nation as a whole was suffering due to an economic downturn. Demand for electric power fell, leaving Kansai Electric scrambling to shore up profits. In 2001, the company announced that plans to construct five new power plants had been temporarily shuttered as a result of faltering sales and profits. In 2002, it reported that over 10 percent of its workforce would be cut by 2005 and that capital investment would be cut by 15 percent. Revenues at all ten of Japan's EPCs fell in 2002. Profits at Kansai Electric fell by 37.3 percent over the previous year, mainly due to the termination of its power plant project.

While Kansai Electric focused heavily on changes brought about by deregulation, public sentiment in Japan remained hostile towards the development of nuclear power. According to a March 2000 Business Week article, however, nuclear power accounted for nearly 35 percent of Japan's electricity. In fact, for much of the 1990s, Japan's industry had aggressively focused on shifting from expensive and polluting coal-fired plants to nuclear power. Due to concerns over the safety of these nuclear facilities, Japan's government was forced to rethink its expansion efforts, cut back on its nuclear development plans, and find alternative sources of power.

Despite public opposition to nuclear power, Kansai Electric began to develop a plan to use reprocessed spent nuclear fuel in power reactors. After delays in 1999, the company received governmental permission to used mixed uranium-plutonium oxide (MOX) fuel at its Takahama nuclear facility. According to Japan Economic Newswire (2004), Kansai Electric intended to use MOX fuel for plutonium-thermal, or pluthermal, nuclear power generation starting in 2007. While supporters of MOX claimed it could be a reliable source of power in Japan's energy sector, safety concerns and general public malaise regarding nuclear power threatened to undermine Kansai Electric's plans.

In the early 2000s, the company faced the promise of increased competition, future deregulation, and uncertainty regarding Japan's economy. As such, it launched a management plan focused on the following measures: increasing its competitive nature; improving its overall customer service; developing new products, including new electric appliances; and continuing its emphasis on global environmental issues, emission control, green power, and recycling. As one of Japan's original regional electric utilities, Kansai Electric stood well positioned to face future obstacles head on.