Saturday, October 1, 2011

01/10 Panel queries TEPCO rates / Customers pay price for flawed accounting, wasteful spending

The Yomiuri Shimbun

Tokyo Electric Power Co. overstated the costs incurred in running its power-supply business over the past 10 years by 618.6 billion yen in reports submitted to the government about how the utility's electricity charges are determined.

The disparity is mentioned in a final draft report that has been drawn up by the independent government panel assessing TEPCO's financial conditions.

The third-party committee has raised questions about TEPCO's method for deciding power-usage rates, suspecting the utility's pricing mechanism has led to inflated prices.

TEPCO has long used the same method to determine pricing, a formula that takes into account personnel and fuel costs, expenditure on investment in power-generation and transmission equipment, plus a certain percentage of profits.

Critics say TEPCO's pricing system is one reason for the utility's failure to improve operational efficiency.

The panel's final draft report emphasizes the need for TEPCO to undergo reforms, and says that having a power-supply monopoly in its service area has negatively affected the utility's business efficiency.

One focus of attention is whether the panel's reference to the 618.6 billion yen disparity between TEPCO's claimed expenses and the actual costs incurred could pave the way for a fundamental review of the utility's pricing system.

TEPCO told the third-party panel it would be able to reduce costs by about 1.19 trillion yen, but the panel said cuts of up to 2.41 trillion yen would be possible.

The panel said the large gap between the two estimates is because TEPCO has not done enough to improve material procurement by its group companies.

The report said: "Most of the group's major companies have a higher profit margin in deals with TEPCO than they do in deals with other companies. In some cases, group companies effectively offset losses from deals with other companies by making deals with TEPCO."

In other words, TEPCO has provided financial support to group companies via sweetheart deals. The report identified such arrangements as an example of TEPCO's inefficient management.

In addition, the report said: "There were many cases of sales agency firms mediating deals" between TEPCO and suppliers of materials.

"The amounts paid [by TEPCO] to such sales agency firms could be reduced," the report said.

If TEPCO revises its dealing with group companies and ends the practice of overly generous deals, some of the group companies may be unable to survive, leading to job losses.

Industry analysts said this is one reason why TEPCO has not taken major steps to address the situation.

In the early stages of the panel's investigation, TEPCO suggested it might raise electricity charges by about 15 percent.

The utility was anxious about the deterioration of its financial health due to the huge bill for compensation payments and the costs involved in decommissioning nuclear rectors.

But the committee's report expressed skepticism about the utility's method of deciding electricity charges.

Electric power companies have to report their expected total costs in advance to the government, and that figure is used as the basis for deciding how much the power companies can charge for electricity.

The panel's report says TEPCO's estimates over the past 10 years exceed actual costs by 618.6 billion yen in total.

TEPCO has lowered its electricity charges four times in the past 10 years, but the panel said the rates could be reduced even further.

The panel said TEPCO's estimates included expenditure on advertisements promoting new electricity-powered devices; donations; purchases of books and other expendables; corporate welfare for employees; contributions to the Federation of Electric Power Companies and other business organizations; and other miscellaneous expenses.

The panel's report concluded, "It is necessary to fully investigate whether such expenses should be borne by ordinary customers."

If TEPCO is made to revise its method of deciding electricity charges, similar reforms will likely have to be made at other regional electric power companies.

(Oct. 1, 2011)

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