Deregulation in Japanese Gas Industries
by
Masayuki Inoue
MIT-CEEPR 94-003WP
March 1994
MASSACHUSETIS INSTITUTE
OF TFlO!NILOGY
SEP 05 1996
UIBRARIES
DEREGULA
-
TI
ON
IN
JA.PA.NESE
GAS
ZNDLUS TR
SIGNIFICANCE AND PROBLEMS OF GAS RATE DEREGULATION
FOR LARGE INDUSTRIAL CUSTOCERS--
MASAYUKI INOUE
Visiting Researcher,
Massachusetts Institute of Technology
Center for Energy and Environmental Policy Research
FEBRUARY ,1994
IE'
a
P
r
-
CONTrATS -
1. Introduction
2. The environmental charges surrounding natural gas in Japan
(1)Current situation of primary energy supply
(2)Changing role of natural gas in energy policy
(3)The role of gas utilities to expand natural gas use
3. Deregulation trend in Japan
(1)Background of public utility regulation
(2)Economic regulation and social regulation
4. Deregulation in gas utility industries
(1)Deregulation subject at issue
(2)Rate deregulation for industrial customers
(a)Current gas rate structure
(b)Major background of rate deregulation
(c)Major advantages to deregulate gas rate for industrial customers
(d)Significance of rate deregulation
(3)Noted point about rate deregulation
5. Deregulation in U.S. natural gas industry
(1)Regulatory structure and brief history of deregulation
(2)Transition of rate deregulation
(3)Competitive rate-making in resale rate
(4)Current situation of cross subsidization
(5)Major impacts on natural gas market by deregulation
6. Summary
-
-
FIGURES -
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE
1.
2.
3.
4.
5.
6-1.
6-2.
7-1.
7-2.
8.
9.
FIGURE 10.
FIGURE 11.
FIGURE 12.
-
FIGURES AND TABLES--
COMPOSITION OF PRIMARY ENERGY SUPPLY IN JAPAN
TRANSITION OF PRIMARY ENERGY SUPPLY (INDEX: 1973=100)
SIGNIFICANCE OF NATURAL GAS IN JAPANESE ENERGY POLICY
PRODUCTION OF CITY GAS BY RESOURCE FUEL (PERCENTAGE)
SALES QUANTITIES BY CLASS OF SERVICE (PERCENTAGE)
TRANSITION OF SEASONAL LOAD CURVE IN "OSAKA GAS"
TRANSITION OF DAILY LOAD CURVE IN "OSAKA GAS"
TRANSITION OF SEASONAL LOAD FACTOR IN "OSAKA GAS"
TRANSITION OF DAILY LOAD FACTOR IN "OSAKA GAS"
THE REDUCTION OF THE AVERAGE COST
GAS UTILITY INDUSTRY TOTAL SALES AND TRANSPORTATION VOLUMES
IN U.S.
TRANSACTION PATHS FOR NATURAL GAS PURCHASES
GAS UTILITY INDUSTRY AVERAGE PRICES BY CLASS OF SERVICE
REVENUE SHARE BY CLASS OF SERVICE IN GAS UTILITY INDUSTRIES
TABLES -
TABLE
TABLE
TABLE
TABLE
TABLE
1-1.
1-2.
2.
3.
4-1.
TABLE
4-2.
TABLE
TABLE
TABLE
TABLE
5.
6.
7.
8.
TABLE
TABLE
TABLE
TABLE
TABLE
9.
10.
11.
12.
13.
COMPOSITION OF PRIMARY ENERGU SUPPLY IN DEVELOPED COUNTRIES
ENERGY DEPENDENCE ON IMPORT IN DEVELOPED COUNTRIES
ANNUAL GROWTH RATE OF PRIMARY ENERGY SUPPLY IN JAPAN
TRANSITION OF NATURAL GAS POSITION IN JAPANESE ENERGY POLICY
THE NUMBER OF GENERAL GAS SUPPLY INDUSTRIES
BY CAPITAL AMOUNT AND NUMBER OF EMPLOYEES
THE NUMBER OF GENERAL GAS SUPPLY INDUSTRIES
BY NUMBER OF CUSTOMERS
THE COMPARISON OF LARGE GAS COMPANIES BETWEEN U.S. AND JAPAN
TRANSITION OF GAS RATE SYSTEM IN JAPAN
OUTLINE OF LOAD ADJUSTMENT CONTRACT SYSTEM
MAJOR TRANSITION OF DEREGULATION POLICIES IN U.S. NATURAL
GAS INDUSTRIES
MAJOR CHANGE IN INTERSTATE PIPELINE RATE DESIGN
CUSTOMER REQUIREMENT BY END-USER SECTOR
REVENUE REQUIREMENT BY RATE CLASS IN "BOSTON GAS"
CUSTOMER CLASS REVENUE REALLOCATION IN "PROVGAS"
TRANSPORTATION VOLUMES DELIVERED TO END USERS
1. Introduction
In recent years , the circumstances surrounding Japanese city gas
industries have been changing drastically. On one hand , as energy
suppliers, natural gas, which has become major fuel resource for city
gas, has obtained a more important place in energy policy. On the other
hand, as public utilities, a new theory of economics and the economic
reform process are requesting new regulatory framework instead of
traditional one. Under such recognition, this study has three major
purposes. The first purpose is to consider the significance of city gas
deregulation in the context of drastic change in energy policy and in
public utility regulation. The second is to discuss the expected
advantages and noted point of rate deregulation for large industrial
customers. The third purpose is to think about the implications from the
U.S. experience of deregulation in natural gas industry since 1970's.
Section 2. reviews the transition of Japanese energy supply
structure and energy policy, focusing on LNG (liquefied natural gas).
Section 3. deals with basic deregulation trend and its background in
Japan. Section 4. focuses on rate deregulation for large industrial
customers among some deregulation subjects. It also studies the current
rate structure, background and expected advantages of rate deregulation,
and noted point to prevent its possible disadvantage. Section 5. briefly
reviews the history of deregulation in the U.S. natural gas industries.
Then, it extends to current situation of competitive rate-making and the
major impacts on natural gas market by deregulation process. Section 6.
deals with future problems for Japanese gas industries to struggle with.
It also attempts to mention some implications from U.S. the experience.
2. The environmental charges surrounding natural gas in Japan
(1)Current situation of primary energy supply
First of all, we will begin by considering the past trend of
primary energy supply in Japan. FIGURE 1 shows that the composition of
primary energy supply in Japan changed drastically after oil crisis I .
The oil dependence rate, which reached 77.4% in 1973, has declined to
56.7% in 1991, mainly because energy policy has converted to promote
introduction of alternative fuels to oil. Compared to other developed
countries, however, Japan is still much more dependent on oil,especially
from the Middle East area and has a frail energy structure(TABLE 1-1,1-2).
-1-
FIGURE 1.
COMPOSITION OF PRIMARY ENERGY SUPPLY INJAPAN
1955 57
59
61
63
65
67
69
71 73
75
77
79
81
83
85
87
89
91
FISCAL YEAR
i OIL D] COAL El NATURAL GAS E3 HTDRO D NUCLEAR [I OTHER
(SOURCE)MITI.'GENERAL ENERGY STATISTICS'
TABLE 1-1.
COMPOSITION OF PRIMARY ENERGY SUPPLY IN DEELOPED COUNTRIES(1989)
(UNIT:%)
COUNTRY
OIL
JAPAN
U.S.
U.K.
FRANCE
W.GERMANY
CANADA
ITALY
COAL
NATURAL NUCLEAR
GAS
i POWER
57.9
18.1
40.7
38.5
27.3i
30.3
10.0
22.8
21.7
41.11
40.0
36.6
60.7
11.3
28.0i
16.7
9.7
11.2
17.2
26.2
24.0
11.8 i
YDRO
ELECTRIOTHEMAL CITY
7.5
8.8
36.2
14.3
9.5
3.7
2.2
1.6
0.2
1.9
0.5
11.4
1.9
-1.6
0.5
(SOUECE)OECD.' ENERGY BALANCE(1980-1989)'
(NUTE)The figure '-1.6'.' 0.5' in electricity means export and iport.respectively.
TABLE 1-2.
COUNTRY
NERGY DEPNDENECE ON IMPORT IN DEVELODD
TOTAL
ENRGY
JAPAN
U.S.
U.K.
FRANCE
W. AN53.2
83.9
14.4
2.3
52.6
DEPEDCE
ON OIL
DEPEDDENCE
ON IWMORT
58.2
39.7
39.0
40.3
40.9
99.7
43.9
-14.7
96.1
95.7
(SOOUECE)OECD.' ENERGY BALANCE(1980-1989)'
-2-
MUNTRIES(1989)
DEPEDECE
ON STRAIT
OF IDFS
61.7
21.7
20.2
32.2
11.5
Meanwhile, natural gas has continuously increased its share in
primary energy supply. In 1989 it reached to 10.0% and came up to 10.6%
in 1992. Though domestic natural gas , which exists mainly in Niigata
Prefecture, has long been used, it's very little in volume. It's not
until 1969 that Japan started to introduce natural gas in earnest when
Tokyo Electric Power Company and Tokyo Gas imported LNG from Alaska. At
present approximately 95% of the total domestic demand for natural gas
is provided by LNG import. Therefore, the history of natural gas use as
one of the major energy resource is relatively shorter than other fuels
oil or coal. After oil crisis I , Japanese government has
such as
introduced some promotional measures to reduce oil dependence and
increase new energy resources. FIGURE 2, which was drawn as an index
assuming 1973=100, shows nuclear power and natural gas has increased
outstandingly. Furthermore, TABLE 2 indicates that natural gas has
increased most rapidly among all energy resources after 1986. According
to the Long-Term Forecast of Energy Demand announced in 1990 by Ministry
of International Trade and Industry (MITI), it is forecasted that
natural gas will have 10.9%, 12.0% share of total primary energy in
2000, 2010 , respectively.
FIGURE 2.
TRANSITION OF PRIMARY INERGY SUPPLY
(INDEX: 1973:100)
2.000
2.500
1.500
1.000
65
67 S9
71
73
75
77
79
OIL CL AouaI i s
(3TA
CI)I.TG
W.C PAATE FNW
TABLE 2. ANNUAL GIE
2,000
.1..... ......
.. 0.
0
1.500
/,
.
Il
m
o
83
7
IS
Is 91
iun Omn
aN
SU
NISTIC
RATE OF PRIMARY ErY SUPPLY INJAPAN
(SOURCE) Ministry of International Trade and Ind&rtry (MITI).
GY STATISTICS'
SGENRAL
-3-
(2)Changing role of natural gas in energy policy
Next, past energy policy in Japan will be reviewed focusing on
natural gas. The era before oil crisis I , can be classified into three
periods. First period is 1945-51, when Japan was pursuing economic
recovery from the devastation of W.W.U . under priority production
system concentrating on the coal industry. The second period is 1952-61,
when Japanese economy made steady growth under rationalization of coal
industry and expanding oil use as major energy resource. The third is
1962-73, when Japan realized high economic growth. Energy policy at the
third period mainly aimed at stable and cheap oil supply corresponding
to rapid increase of energy demand. Afterward, it was focused on the
countermeasures of energy emergency and conservation during 1973-78,
introduction of alternative energy for oil, best mixture of energy after
oil crisis II. As described above, major purposes of energy policy has
shifted very closely linked with economic growth phase.
Concerning natural gas, though its abundant reserves and
cleanliness have been highly regarded since LNG's introduction, its
position in energy policy has remained low because of the contract
rigidity and the price
linkage with crude oil. As natural gas use
expands, however, it has obtained more important position in
policy. According to FIGURE 3, situation changes surrounding
gas can be summarized as following three points. First, natural
been valued much more highly recently as a clean energy for
energy
natural
gas has
global
environmental problems including C02, instead of local pollution such as
NOX, SOX. Second, the utilizable area for natural gas has spread due to
technological progress such as fuel cell and cogeneration. In addition
to that, natural gas is expected to contribute easing tight supplydemand situation in electricity market through decentralized electric
sites. Third, The Gulf War made us realize again strongly the necessity
to reduce the dependence on Middle-East area. Though some new LNG
area recently,there still exists
Japan's LNG import is now mainly
projects started in Middle-East
potential anxieties in the area.
dependent on other areas; Indonesia 47.1%, Malaysia 18.5%, Brunei 13.9%,
Austrailia 10.8% in 1991. Under these circumstances, the Committee for
for
Advisory- Committee
under
formed
Issues,
Fundamental
Gas
Energy,finally placed natural gas as one of the major energy resource in
energy policy instead of other alternatives to oil (TABLE 3, ENDNOTE 1).
-4-
1L&TURAL
GAS IN JAPANESE ERY POLICY
FIGURE 3. SIGNIFICANCE OF
1.Necessit to expand natuml mas ue so far
Environmental
•oblem under
the high econmic
Reduction of SOX
ro.wth
rwoutmity TA
Oil crisis II
-1nt
Introduction of
alternative fuel for oil
mpu
nstwrm] gm
w~w-Aa ruivxw
Lnwomice
L
Sthrouh city gas
I
2. Necessity to exand natural ms use under the new ery enviroiment
Global enviro -tal iz.Im Ptlwtim
of M23
S OGY POLICY
INJAPANe
TABLE 3. TRANSITION OF NATURAL GAS POSmNTI
1967. 2
ACE. Report
1975. 8
iON ELA7
DECI
YEAR
REPORT
Advisory Camittee for Energ(ACE) .Report
SIt' a•rt
I977. 8 -Nat
ACE. Meetir~ for F udmental Ims.
disperse
mto
uer rwmourc.0to
w
U iwort ositively
to introduce
•t
s am be hithly valed in t
o
up ply are.
t reserve
of reave ram.•nvwirmmtal clealines.
Ivariation
Interi Report
s exploitation
i poitively.
It's i rtnt to introduce LNG
Nxtualm am be higbly valued t retrain air pollution.
diversit
'Choice for stable supply
10 NATURAL GAS
It'
a ia'rtant to port dmstic natural
in t atof local econic develomnt.
amcm be hidly valued in tarm o•upply stability
a
983. 8 -Naural
ACE. Subcomittee for Suppl@y-Damd lames.
ta clmlinm .
'Long trm perspective for supply &drd 983. 11 •a contol of cobution.u nvirw
rource fir city esad power
1987.10 It' a pproariate a
'Revised lon-ter pmspective'
am!eratim inn
ACE. Report
SChallenge to no global ensyg t
1990. 6
'
ACE.Subomiitte for Urba Enw .
~ mm.
Fndenta Gas
Comitte fotar
Intrim R ort
992. 5
area,
cm
a be hiahly valued in trm o cmatively
hi~usupply stability.2lowa r C2• imi ni in fowil fuel.
* Nstural
It es cm u to a ra bn atural s should be intrd
strIgly.
the mar ame•y
abould be placd a one of ~
Naturl
in Janebseuiyv olicy.
(SOURCE) Reports by Advisory Comittee for Ene
-5-
d
(3)The role of gas utilities to expand natural gas use
It is city gas industry which should have an important role to
expand natural gas supply to customers. Japanese gas industries can be
classified into three kinds; general gas supply industries, community
gas supply industries, liquefied petroleum gas industries (ENDNOTE 2).
Among them , general gas industries mean so called "city gas
industries". The number of general gas supply industry is 246 in 1993.
As TABLE 4-1 and 4-2 shows, they vary in scale very much in terms of
capital amount, the number of customers and employees. The biggest 4 gas
companies Tokyo Gas, Osaka Gas, Toho Gas, Saibu Gas, whose franchise are
populated urban areas , containing 70% of the customers and 78% of
sales. TABLE 5 is comparing the scale between the U.S. LDCs and Japanese
city gas utilities.
TABLE 4-1. THE ?n R OF GNERAL GAS SUPPLY INDIThIES
BY CAPITAL AWXIN AND NL~ER OF EIYEES (1992)
Nuer of employees -10 11- 61- I01-50
:apital
100
1
Total
300
namunt
( l)
- 30 Killion
30 - 50 million
50 --100 Killion
100 milliorr- 1 billion
1 billiar
Private Owned Total
Public Ow[ed Total
To ta 1
14
1
26
3
401 8
4
22
17 i II1 3
13 102 29 I16I 14
30
32
7! 21 I
21
35
55
53
12
174
72
43 134
246
6
6
3
-
(SOURCE)JAPAN GAS ASSOCIATION. 'HANDs
36i 18i 15
ONTIE GASB• •ESS
TABLE 4-2. THEN1
M R OF (EERAL GASSUPPLY
Il•IYIES BYNAB OF CUSZ S (1992)
Omiship Privateily Publicly Total
Ownd
Owned
No. of cautmrs
-1.000
2
1
3
1.001-2. 000 i
11
6
17
2.001-3. 000
19 i
12
31
3.001-4. 000
4.001-5.000
5.001-10.000
11
17
24
8
5
18
19
22
42
10.001--50.000
50.001-~100,000
100. 001-300.000
300.001~.5000
0
500.001.Total
64
8
11
2
5
174
18
3
1
'72
(U0 ) JAPAN GAS ASSOClATION
'BAM00 ON EWGAS ISlESS"
TABLE 5. COFARISON OF LARGE GAS CDWANIES WTIEN U.S. AM JAPAN
outry Nam of tbhe Ca
Y
SSoutbern California G
.Pacific Gm Electric
U.S :Arkla Inc.
*Consolidated Ga
NMberof
Ctome
(thousn
4.649
3.500
2.676
1.738
Opfe19
pI
RIemI
raing GoSala
IO 1 Volme
(thoupmr 3)(thbom•r
s)dM
2.930.306
2.951.442
1.771.600
2.607.000
1.333
304.597
19. 100
230.100
406.621
651.569
402. 000
273.300
7.677. 6.309.014
5.552 5.007.220
286.290
264.375
215.053
700,200
20,633
Distribution Co.
*"1MO0 GAS CO.
JAPAN :OSAKA GAS CO.
*;.'m
GAS CO.
SAIe
S GAS CD.
1.433
982
1.369.44
283.926
52.019
55.455
,45.726
(OTE) l.
tie
fre
of U.S isfr 1991(CT).ad that of Je i tfor 192(FT).
2.0peratinl Reyvemn and Op•atin •l m are amnvrtd aman
f
IS a 1124.80.
.averawadrbn rte in 1992•(
.
3. Japm aW
mie
a volm isalcp
lted by 1 cubic Mtnu 42.3 cubic feet
(SOU
.amaing that I cabic foot a 1.031 BI
'RE'BR •S DI"ECm
Y 1992-93 .WMRIE
AM•ICA AD IlMIISI
TIOL.GAS OI•ANIES
Jagmame firva are b6'AIIAL ET 1992 aof I cmwni .
-6-
82
11
12
2
5
246
FIGURE 4.
PRODUCTION OF CITY GAS BY RESOURCE FUEL
(PERCENTAGE)
iAl
IUU
I00
80
80
60
60
40
40
20
20
A
0
1965
1970
1975
9 LNG.NG
1980
FISCAL YEAR
0
COAL
1985
1990
1991
0OILO- OTHER
(SOURCE)JAPAN GAS ASSOCIATION.
'HANDBOOK ONTHE GAS BUSINESS'
Japanese city gas industries used coal and petroleum as a major
materials to manufacture gas in 1950's and 1960's, respectively. As big
gas companies, however, introduced LNG and developed a natural gas
conversion since 1970's, natural gas shares including domestic one
reached 77.1% of all industries and about 90% in big companies in 1991
(FIGURE 4). Of the whole Japanese LNG imports, electric utilities have
an overwhelming influence, occupying 73.7% in 1991. The share of gas
utilities, however, has risen from 20.0% to 24.8% in 1991. Comparing the
annual consumption growth rate during 1980-85, 86-91, they are 11.5%,
8.5% respectively for city gas utilities, in excess of 10.5%, 5.3% for
electric utilities. Under such a situation, Committee for Gas
Fundamental Issues p•inted out "City gas industries should play a major
role to deliver natural gas to customers ".
3. Deregulation trend in Japan
(1)Background
of public utility
regulation
As we saw in Section 2, the obstacles to promote natural gas
introduction are to stabilize natural gas price and to reduce business
risk accompanied by long-term upstream contracts. On the domestic side,
current regulatory framework should be reconsidered.
-7-
Public regulation, which is generally defined as "government
intervention in national and industrial activity to achieve specific
policy goals", sometimes includes macro-economic policy such as monetary
and fiscal policy in its wider definition. In the more narrow
definition, it means "restriction by government on industrial activity
to achieve policy goals which can not be achieved by market mechanism,
by way of licence permit, authorization or informal administrative
guidance." Therefore, public regulation aims at achieving fairness and
efficiency , which are sometimes conflicting with each other, by
government intervention .
As to the public utilities such as electric, gas and water
utilities, they have been regulated because their service have been
regarded as typically public, necessary and natural monopolies.
to pursue
Government has allowed the monopolies in their franchise
economic efficiency on the one hand, having regulated strictly new
entry and pricing on the other hand. These regulatory policies have been
generally successful because they have prevented destructive competition
"fairness" and
and overlap investment and achieved well-balanced
"efficiency" to some degree, at least during the period when Japan has
tried to catch up with the developed countries. In some fields, however,
such as energy market for large industrial customers or power generating
market etc., the basic ground like natural monopoly, economies of scale
have been changing.
Therefore, it is the time to reconsider what should be left for
market mechanism and what should be regulated by public authority. Some
("Rincho",
of the reports by The Administrative Reform Council
such recognition
related
to
"Gyokakushin")
have
already
shown
deregulation since 1983. In Dec.1988, Rincho reported that "Social and
economic circumstances have so greatly changed that traditional
regulatory policies and their role should be reconsidered". As to energy
industries, it also pointed out "Energy demand is being diversified with
life and industrial activity by
the rapid change of national
technological progress. Electric and gas rate structure should be
examined to make them more flexible , considering supply security and
equality among customers."
(2)Economic regulation and social regulation
It is necessary to classify current regulations according to
their purposes to examine what should be deregulated. In general, they
are classified into economic regulations and social regulations.
-8-
Economic regulations aim to supplement market failure to raise economic
efficiency. More concretely, they mean entry and price regulations in
natural monopolistic industries. Social regulations are implemented to
secure consumer safety , social equality, and to protect socially weak
people such as low income households. However , as the Gas Utility
Industry Law mainly aims at three goals, protecting public interest,
developing the
industry soundly,securing consumer safety including
environmental pollution, actual regulatory policies are so complicated
by economic and social regulations that deregulation can not be applied
to them all uniformly. As to social regulations, they should be
deregulated very prudently considering social goals. Some of them such
as environmental regulation or product liability issues should be even
strengthened, far from being deregulated. What is currently strongly
requested in Japan is to reconsider economic regulations which has been
implemented under the assumption of past technological conditions and
market circumstances.
The new Coalition Government, started in July 1993, replacing
the Liberal Democratic Party which had been in power 38 years since
1955, seems set to promote deregulation policies strongly. They are
expected to stimulate Japanese economy, which is suffering from probably
the longest recession after W.W.II . Normally , however, it takes time
for the result of deregulation to penetrate into the market. Therefore,
they should be interpreted as the first step of the economic structural
reform in the long run, not as short-term economic stimulus policy. The
positive attitude of new Coalition Government to push deregulation
policies can be significant not only to find new deregulation areas, but
also to put them into practice, they had previously been only considered
but not have been carried out.
Economic Reform Advisory Group (consultation committee of Prime
Minister), which was established in October 1993 , is expected to make a
long-term vision of the future Japanese economy. They suggested in the
interim report that economic regulations should be basically eased. As
to the electric and gas industries , they suggested that current
regulation should be eased to give utilities more incentives by
introducing more competition principle to gain consumer benefit (ENDNOTE
3).
Thus, it is none other than dynamically changing era that is
demanding deregulation not only in electric and gas utilities, but also
in whole Japanese economic system.
-9-
4. Deregulation in gas utility industries
(1)Deregulation subject at issue
Currently, the deregulation subjects at issue in city gas
industries are constituted of mainly , ( gas rate reform for large
)franchise reconsideration of city gas
customers,
industrial
industries, Z mutual usage of natural gas pipelines. Franchise expansion
of city gas has not been discussed earnestly in order to protect small
and medium companies in local areas and to avoid difficulties in
settling the territory negotiation with LPG industries. Mutual usage of
natural gas pipelines means releasing surplus capacity of pipeline and
introducing contract transportation. This is so common in the U.S.
already that 84% of the interstate pipeline is occupied by contracttransported gas. From now on, contract-transportation will be a key
issue because natural gas demand in industrial sector is expected to
grow rapidly and local small-sized and medium-sized gas companies will
receive more natural gas through pipelines from large gas companies.
By the way, deregulation is being considered in Electric
industries as well, and reconsideration of electricity selling system
has an impact on city gas industries. At present with few exceptions,
decentralized power generators or cogenerators in the factories are
allowed to sell their surplus electricity only after their own
consumption The Committee for Fundamental Policy Issues under the
Advisory Committee for Energy has just suggested in the interim report
Dec.1993, to promote electricity purchase by utilities through entry
deregulation. For city gas companies, entry deregulation in power
generating market can be a positive opportunity to expand natural gas
use. However, there still exists many problems to solve such as how to
secure supply stability, how to set the price for surplus power, and how
to impose generating responsibility for self generators or cogenerators.
The following description is focused on easing rate regulation
customers, which is a typical and traditional
for industrial gas
economic regulation. It also covers to its background, expected
benefits, significance and points which should be noted.
(2)Rate deregulation for industrial customers
(a)Current gas rate structure
Currently, city gas rates are regulated by MITI , which
supervises gas utilities through the Gas Utility Industry Law. The
principles used to set gas rate are based on "cost-based-principle ",
-10-
"fair-return-principle", and "equality-principle among customers". Under
such regulatory framework, city gas rate system has transformed from
flat volumetric rate, declining block rate, single two-part rate, and
plural two- part-rate (TABLE 6).
TABLE 6. TRANSITION OF GAS RATE SYSTEM IN JAPAN
RATE SYSIM
GAPH
CHARACIERISTICS
Scharge
(Advantage)
*easy and simple to calculate gas rate under
the uniform demnd structure
VoU11TRIC FLAT RATE
(Disadvantage)
*not reflecting load responsibility.
- difficult to encourage consuers to conserve enertg
usage volume
charge(
)e5at.vdA
*ainimu charge secures to collect demnd cost.
*closer to arginal cost pricing .which is roved
most efficient in economic theory.
BLOCK RATE WITH
MINI
chaIARGErge
(Disadvantage)
* irrationale during minim. usage obliption
*The gap between declining long-temm argina cost
mini"uschar ge
and actual rate level is expanding
usage volume
charge
(Advantage)
* imroves the c rrespondence between cost md rate.
SINGLE TID PART RATE
(Disadvantage)
*not reflecting cost differentials caused by
different uage conditions
minimum charge
charge
(Antar)
* improves the correspodence btween cost and rate.
in single two-part rate.
(Disevaitage)
catamer' incentives to conlerve energy.
Sbecame rate table is applied after the fact.
• lacks
*
PLURAL 110 PARK RATE
,
mini
,
chare
mspondnmce between c mdity chbarge and demnd
•
charge is distarted.
usage volume
(SOURCE) Deryoku Shinpoha."Public Rate in Japn' etc.
-11-
At present, large city gas companies are adopting two sorts of
rate menus ; general rate and load adjustment contract rate. General
rate is defined as the rate when utilities supply gas responding to
general public demand following to the authorization of Article 17 in
the Gas Utility Industry Law. Gas rates are mainly classified into
declining block rate system and two-part rate system. The single twopart-rat system was introduced in 1980 to improve the problems of
declining block rate. The first problem was that it lacks incentives to
conserve energy use during minimum charge. In addition to that, the
relation between rate and cost was unclear. However, single two-partrate system still had problems ; (1 expanding rates and declining longterm marginal cost as a result of natural gas conversion. ® not
reflecting cost difference because the same demand charge and commodity
charge are applied to different customer groups regardless of usage
amount. Then finally, plural two-part-rate system was adopted by big gas
utilities in 1990. Thus, past transition of gas rate system has been
aiming at (A)improving the relation between cost and price, (B)raising
and (C)dealing with increasing
load factor,
daily and seasonal
competition in energy market.
Meanwhile, the load adjustment contract rate is defined as the
rate which is authorized by Minister of International Trade and Industry
when certain criteria such as demand scale and load factor are
only
satisfied. Therefore, it is a rate system which is most reflecting the
goals of above (A),(B),(C) (TABLE 7). This rate system was first
introduced in 1979 based on the report by the Advisory Committee for
Energy to create large-scale and load adjustable demand as Industrial
LNG Contract System. As a result, natural gas demand from industrial
customers, especially Industrial LNG Contract System , which consumed
over 4 million cubic meter per year , has increased rapidly mainly
because it has become possible to set a price competitive with other
fuels. After its introduction, the criteria of usage scale was lowered
to 1 million cubic meter. Application was also widened to eight rate
menus. Still, however, pricing has to be authorized case by case by the
Minister according to provision, Article 20 in Gas Utility Industry Law,
"General gas utilities is prohibited to supply gas other than supply
rule authorized in Article 17, but this rule is not applied in special
case where Minister approves it." So, load adjustment contract rate is
still an exceptional status in the rate structure. Furthermore, 4 of
eight menus are comprehensively authorized, but the rest of them have to
be done case by case. as to exclusive supply contract for high load
-12-
TABLE 7. OLTINE OF LDAD
JUS•ENf CONTRACT SYSTEM
KINDS OF CONTRACT
i
MAJOR PURMOSES
Exclusive supply contract for I*to create huge scale and high
high load medium pressure gas load factor demnd throughout a year
(Type 1. Type 2.)
Time-of-day contract (A)
MAJOR CUSTIMERS
imachinery industry.
chtmical industry.
metal industry
laundry
food maker
_*to induce the load to midnight or
Time-of-day contract (B)
(Type .Type 2.)
dawn to ease the burden of peak-time
Time-of-day contract (C)
Gas cooling contract
(Type 1.Type 2.Type 3)
) to expand the demnd for gas-coolong in
sanmer season. when load factor is lower
Air conditioning contract (A)
(Type lTy*pe 2.Type 3)to
Air conditioning contract (B)
Small-scale air conditioning
food business
machinery industry. etc
achinery industry.
chemical industry,
metal industry
office. hotel etc.
office.hotel etc.
expand the d
nd for air-conditioning
.which has high load factor throughout
a year
I
(Type A.Type B.Type C)
ll and medium sized
business building
medium pressure contract, the authorized period is limited to just one
year , so even if renewal is practically automatic, the whole
authorization process is repeated every year.
Rate deregulation for large industrial customers, which is most
hotly debated, means reforming the process from strict authorization to
ex post facto report. If this deregulation policy would be implemented,
supply conditions including gas rates, would be decided by negotiation
between gas companies and customers. In that sense, rate deregulation
can be interpreted as more flexible application of load adjustment
contract. In addition to the rate reform, reconsideration of franchise,
which allows gas supply beyond current supply area limited only to large
industrial customers, is also being debated.
-13-
(b)Major background of rate deregulation
A drastic change around gas utilities lies behind such a
deregulation trend as an important background. Especially, in big gas
utilities, we can point out the big changes in both supply and demand
side. In supply side, supply capacity of the gas pipelines has increased
as a result that natural gas conversion was completed. In addition to
that, supply has transformed from a local area operation to a wider one,
because supply network of the pipelines has been well developed. In
demand side, while annual growth rate for residential and commercial
demand were 3.6% and 4.6% in 1980's respectively, in industrial sector
it was 9.8%, more than the other. The proportion of industrial demand in
total gas sales amount has also increased rapidly, which reached to
28.5% in 1991 (FIGURE 5). These changes are mainly because natural gas
has been highly valued as an industrial energy resource which has high
energy efficiency and environmentally friendly aspects. Expanded area of
utilization has also contributed to demand growth. Furthermore,
increasing competition in energy market among gas, electricity , oil has
expanded the alternative choices to customers. Customers' diversified
needs demanded more competition.
FIGURE 5.
SALES QUANTITIES BY CLASS OF SERVICE
(PERCENTAGE)
9:^
100
IVV
80
80
60
60
40
40
20
20
n
n
1965
70
75
85
80
90
FISCAL TEAR
0 COUERCIAL E3 INDUSTRIAL 0 OTHER
R
RESIDENTIAL
(SOURCE)JAPAN GAS ASSOCIATION.
'HANDBOOK ON THE GAS BUSINESS'
-14-
91
different demand characteristics from that of residential and commercial
customers. First, they have much more diversified demand structure mixed
with electricity, gas, oil, LPG etc. Therefore, energy market for
industrial customers is very competitive. Second, they have a much
greater ability to switch fuels than residential and commercial
customers. Third since their demand is so diversified, they have
these
companies. Under
against gas
power
stronger bargaining
characteristics, it is hard to meet their needs through the same
regulatory framework as residential and commercial customers. These
changes in market circumstances and diversification of customer needs
has promoted a transformation of the rate system and accelerated the
deregulation trends.
(c)Major advantages to deregulate gas rate for industrial customers
Then, what kind of benefits can be expected as a result of rate
deregulation for large industrial customers ? First, gas rate for large
industrial customers can be lowered through the competition with other
fuels. The second expected benefits is the improvement of the capacity
utilization rate. Gas demand fluctuate very much seasonally and daily.
FIGURE 6-1 and FIGURE 6-2, monthly and hourly sendout in OSAKA GAS,
which is one of the big gas utility in Japan, show that gas demand in
than that in winter.
summer season in 1970 used to drop less half
Similarly as to the hourly pattern, demand during midnight to dawn was
less one tenth than that of evening. Expanding industrial customers in
1980's improve the capacity utilization rate and lower the average cost
because their demand patterns are much more levelized throughout the
year. According to FIGURE 7-1 and FIGURE 7-2, both seasonal and daily
load factor (average consumption /maximum consumption(%)), which is one
of the indicators of capacity utilization rate, has improved from 1970
to 1991 . At the same time, the ratio of off-peak-hour, off-peak-month
to peak-hour, peak-month have also improved . They rose especially in
late 1980's, because the economies of network scale began to penetrate
into the market then. In addition to that, from the systematic aspect,
system
rate
contract
adjustment
load
application of
flexible
institutionally promoted to create the demand, which contributed a lot
to improve load factor.
-15-
FIGURE 6-1.
THOi•SANLD
jB: NETER
065,00
00. 000
500, 000
500. 00
400. 000
.. ...
.
..
.......
300. 000
-..
400. 01C
- -o
."
300. 000
20C. 000
200. 000
100. 000
100, 000
0,
4
5
6
7
8
9
10
11
12
1
2
3
NONTH
1975(FY) 1980
) 1985F
1985(FY)
90(FY)
1992 FY)
0(SOURCE SAKA GAS
FIGURE 6-2.
THOUSANDS
OFCUB]"C
ETE
1.600
1,
400
I,bUU
1,400
1,200
1,000
800
600
400
200
0
1, 200
1, 000
V
8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 1 2 3 4 5 6 7
HOUR
1975(FY) 1980(FY) 1985(FY) 1990(FY) 1992(FY)
(SOURCE)OSAKA GAS
(NOTE)Above graphs are averases of the 10
largest sendout ;n each year.
-16-
800
600
400
200
0
FIGURE 7-1.
100
100
80
80
60
60
40
40
20
20
0
0
1975
1980
1985
FISCAL YEAR
1990
1992
M
MIN MOMTH/MAX MONTH Q AVE MONTH/MAX MONTH
(SOURCE)OSAKA GAS
FIGURE 7-2.
1975
1980
1985
FISCAL YEAR
1990
MIN HOUR/MAX HOUR 2 AVE HOUR/WAX HOUR
W9
(SOURCE) OSAKA GAS
-17-
1992
Third, it's not only large industrial customers, but also
the
residential and small commercial customers who can benefit from
rate deregulation from lowered average costs. Theoretically, the third
point can be explained as follows. In FIGURE 8, when price is set based
on average cost, price would be Po and demand would be Xo
0 . At this
time, customers who can choose alternative cheaper fuels, would not
demand gas. In case the price would be lowered to P. as a result of rate
deregulation, new demand by large industrial customers, (X,-Xo), would
be created. Accordingly total average cost would be lowered to P*. That
is; it is possible to lower the price for residential and small
commercial customers as well through raising allocation efficiency by
setting the price for industrial customers closer to marginal cost.
Besides, it's common to build a high-pressure or medium-pressure
pipeline to meet increasing demand by large industrial customers. It
would encourage formation of a gas pipeline network to increase supply
capability. This will secure supply stability for future demand.
FIGURE 8. THE REDUCTION OF THE AVERAGE COST
'FMANn C~IIRVF
E COST CURVE
s
P*
MARGINAL COST CURVE
P•
P1
..
Xo
Xi
We can point out more benefits of deregulation. According to
Uekusa [1991] (ENDNOTE 5), it can be generally expected a wider variety
of rate menu, better quality of service through higher efficiency, wider
choice for the customers through service diversification, reduction of
the administration cost related to regulation. It is truly a big benefit
to be able to provide wider rate menu and diversified service depending
on supply conditions for customers because it is customer needs which is
providing rate deregulation.
-18-
What we should note here is the importance of transfering
benefits to customers. It's gas utilities which can benefit directly
from improving capacity utilization rates or decreasing average costs.
Deregulation policy should be considered as a great success when
customers can benefit from lower rates, wider energy choices, and better
quality of service.
(d)Significance of rate deregulation
As discussed above, the significance of rate deregulation for
large industrial customers can be understood as follows. In terms of
energy policy, rate deregulation means systematic improvement to expand
natural gas use as we saw in Section 2. In terms of public regulation as
we saw in Section 3, it means to reconsider traditional regulatory
framework and to introduce a principle of competition in the public
utility area even though it's just for large industrial customers at
present. From the customers' standpoint, they can benefit from more
flexible pricing and supply conditions, and expect lower prices.
Moreover, in terms of the relation with other deregulation subjects, we
can understand this as the beginning of an earnest deregulation process.
It's very possible for other deregulation subjects to be promoted by
rate deregulation, because franchise reconsideration, which may come
next to rate reform, may require the introduction of common carriage and
the expansion of natural gas use in decentralized power sites.
(3)Noted point about rate deregulation
Then, what is the point we should note in case of rate
deregulation ? The most likely problem is that in lowering rates for
large industrial customers in the competitive energy market, gas
companies may unfairly transfer their cost to small customers. In other
words, it is feared that they may exclude competitors from the market by
unfairly lowering the gas rate. As a result of it, gas rate for small
.
customers may rise. Moreover, there is a certain gap in rate level
between large customers and small customers even now. The disparity
between them may be expanded. These likely disadvantages as a result of
deregulation are against "equality-principle among customers" in the Gas
Utility Industry Law. Some even point out it's also against Anti
Monopoly Law, which provides for fair competition. These anxieties are
explained by the concept of cross-subsidization in economic theory.
Cross-subsidization is defined as "the activity of enterprises which
have plural demand sectors, to make up the deficit in one sector from
-19-
the surplus in profitable sector" (ENDNOTE 6). In case of gas rate
deregulation, it means to transfer cost unfairly from large customers to
small customers in order to be competitive and to beat the competitors
in the market(ENDNOTE 7). To prevent unfair cross subsidization, it is
necessary to examine if the rate for each customer class is fairly based
on cost. To that end, it is important to make a separate accounting for
each customer class, but cost allocation to them can be arbitrary,
because there are so many common facilities for residential, commercial,
and industrial supplies.
Actually, it is reported that some industries such as petroleum
and LPG industry are strongly opposing gas rate deregulation for large
industrial customers, and requesting city gas utilities to prevent
unfair cut-rate by disclosing each rate case in the debate in the
Committee for Gas Policy Issues, which is considering desirable city gas
supply system (ENDNOTE 8). It is also reported that some of them assert
that gas utilities should be divided into different bodies by customer
classes of service, because making a separate account is insufficient to
prevent unfair cross subsidization.
Accordingly, regulatory authority will have a new regulatory
mission to prevent unfair cross subsidization by supervising separate
accounts. They are also supported to have new concerns to see the
benefit or influence on small customers.
5.Deregulation in U.S. natural gas industry
(1)Regulatory structure and brief history of deregulation
Comparing the industrial structure and the circumstances between
Japanese gas utilities and the U.S., it will be found that there are
many differences between the two. First, there is abundant domestic
but Japan is dependent on
gas reserves in the U.S.,
natural
approximately 95% on LNG import. Second, there is a big difference in
price advantage against oil. Historically, in the U.S. much of the
natural gas was collected as associated gas with oil exploitation, so
natural gas price has been usually lower than oil price. On the other
hand in Japan, LNG price is so closely linked with oil price that it's
not really price competitive against oil basically. Third, we can point
out the big differences in industrial structure. U.S. natural gas
functions;production,
three
by
speciallized
are
industries
transportation and distribution. in Japan, however, LNG import,
-20-
gasification, transportation and distribution are vertically integrated
(ENDNOTE 9). In addition to them, there is also a big differences in
supply infrastructure.
In the U.S., large gas wells were discovered in south-west area,
mainly in Texas and Louisiana in 1930's. To connect these production
areas and the North-east area, where demand had been rapidly increasing,
interstate pipelines were built nationwide. In 1960's the current
pipelines network was almost completed. It covered approximately 450
thousand kilometers. On the contrary in Japan, there doesn't exist
trunklines and whole length of the pipelines for
nationwide
transportation is just 1300 kilometers long. As to the deregulation
trend as well, the U.S. differs from that of Japan, because it started
by wellhead price decontrol in the late 1970's and open-access in
interstate pipelines followed. As to the rate deregulation, however,
there's some similarities between the two. In the following, I would
like to focus to see three points in the U.S. natural gas industries
;(l)brief sketch of regulatory structure and past deregulation policy,
(2)deregulation trend in resale rate and some measures to prevent bad
effect, (3)major changes and influences in the natural gas market.
Regulatory authorities of natural gas industries vary dependent
on the stage from upstream to downstream. It is the Department of Energy
(DOE) and The Economic Regulatory Administration (ERA) which are in
charge of the export and import of natural gas. Federal Energy
Regulatory Commission (FERC (ENDNOTE 10)) supervises production at the
wellhead and interstate activities. It varies from state to state which
regulates intrastate pipelines and Local Distribution Companies
(LDCs);The department of Public Utilities (DPU) or Public Utility
Commission (PUC) or Public Service Commission (PSC) etc. These dual
regulatory structure, which means federal level and state level, is
characteristic of U.S. natural gas industries in administrative aspect.
TABLE 8 briefly summarizes the regulatory history of U.S.
natural gas industries. FERC implemented Order 636 as a final rule to
complete a series of deregulation policies since late 1970's. The era
before Order 636 can be divided into three periods. The first period was
until 1978, when Natural Gas Policy Act (NGPA) was implemented to solve
the serious gas shortage problem. The second was so called "gas bubble
era" since NGPA to mid 1980's. The third era was since mid 1980's to
Order 636, when open-access was strongly pushed through Order 436, Order
500 etc.
-21-
TABLE 8. MAJOR TRANSITION OF DEREGULATION POLICIES IN U.S. NATURAL GAS INDUSTRIES
ACT, ORDER YEAR
NATURAL GAf1938.6
ACT(NGA)
PHILLIPS 1954.6
DECISION
MAJOR CONETIES OF POLICIES
Construction. transportation and the rate of
interstate pipelines were regulated by Federal
MARKET CIRCUMSTANCE OR PURPOSES
RESULT
)interstate transaction increased.
Zenacted to protect consumers
Power ComissionlFPC).
from pipelines' exploitation.
Regulartory coverage of FPC under NGA was extende
to wellhead price control
Lawsuit was wide between Wisconsin
state and Phillips Petroleum over
1well by well regulation didn' t work well.
2Area rate.national rate were developed.
wellhead price.
1978. 11 )natural gas was classified into 23 category.
NATURAL GAS
high cost gas.old gas and new gas.
POLICY ACT
)ellhead price control of high cost gas and
(NGPA)
new gas were removed in Nov. 79. and Jan.85.
imed at solving supply shortage
in interstate natural gas market.
Zaimed at mintaining natural gas
price equivalent to oil.
(Control of old gas was also abolished in Jan.93.)
ORDER380
1984.5 Minimm commodity charge clause was abolished.
)price surged due to deand decrease.
moinium comodity charge prevented
LDCs from procuring cheap gas.
Ne exploitation was strongly developed.
Supply-deand situation was reversed to
gas bubble.
tduced the advantage of pipeline companies
against LDCs.conamers.
)piled up take or pay deficit in pipeline
cauqwnies.
ORDER436
ORDER500
i985. Il lopen access transportation
1987.8 Znon-discriminatory release
first-come first-served allocation principle
Acontract demand adustment right
transportationrate was unbundled.
)aimed at solving take or pay iauues.
)to respond expanded spot market.
)to secure flexibility of trasportation
promted the functional chuge of
pipeline companies from sales to contract
tram portation
by pushing comon carrTiage.
to promote open access transportation
)take or pay credit for producers ware obligated.
Ttake or pay cost can be passed on rate.
ga inventory charge was introduced.
ORDER636
1992.4 Dpipelines that offer fire and interruptible
transportation service must unbundle services.
pipelines that make bundled sales miust provide
non-discriminsatory.non-notice transportation.
f irm and interruptible service must be offered
based on equality of service.
)storage capacity of pipelines must be released.
)receipt and Delivery point miet be flexibilized.
)SFY rate design mist be applied instead of WFV
ffinal restructuring rule since 1978
Zto promte market competition maintaining
supply reliability
(to widen the choices for purchasers
to levelize competition conditions amng
sellers
for interstate transportation service.
(SOURCE)PUBLIC UTILITY REPORIS.'THIE REGULATION OF PUBLIC UTILITIES'.
CATO INSTITUTE.' REGUILATION. WINIER 1993 -IHE NEW AGE OF NAlURAL GAS-'
NATIONAL PETROLEUM COUNCIL,'•TE POTENlAL FOR NAllURAL GAS IN 1TE UNITED STATES'
ETC.
Federal regulation gave a big impact on
state regulartory policies
The Natural Gas Act (NGA) started to regulate the interstate
pipeline business in 1938 and the 1954 Phillips Decision allowed the
federal government to control wellhead prices. As a result, the
exploitation incentives were kept so low that market faced serious
natural gas shortage in 1970's. After NGPA was implemented, the supplydemand situation in the market was reversed, entering into the gas
bubble era. Though the gas bubble has been shrinking compared to the
peak in 1985, it has been a basic feature through 1980's. Major goals of
the deregulation. policies in 1980's were how to deliver gas effectively
and how to allocate risks related to natural gas transaction from
wellhead to burnertip among producers, pipeline companies,LDCs and
consumers under gas bubble situation.
(2)Transition of rate deregulation
As described above, U.S. natural gas industries are specialzed by
three functions;production, transportation and distribution. There are
three kinds of gas prices according to each stage;wellhead price, city
gate price and resale price. Wellhead prices had been under price-cap
control of FPC or FERC since Phillips Decision in 1954. The control for
high-cost gas and new gas, however, was abolished following NGPA in
November 1979 and January 1985 respectively. Old gas as well was
released from regulation in January 1993 bu Natural Gas Wellhead
Decontrol Act of 1989. Transportation price had been regulated in terms
of consumer protection because interstate pipeline industries have been
regarded as a typical natural monopolistic industries since NGA was
formed. FERCethought their natural monopolistic feature as a big
obstacle to make the market more effecient through competition. Then in
mid 1980's, FERC pushed common carriage transportation through nonon
regulation
9 shows,
As
TABLE
open
access.
discriminatory
transportation rate has changed about allocation of fixed cost and
variable cost. At present, FERC adopted SFV (Straight Fixed Variable
Cost) instead of MFV (Modified Fixed Variable cost) after Order 636.
As to resale price, flat rate was predominant until the beginning
of this century, when natural gas was plentiful, cheap and transported
short distances. Next in the 1920's, declining block rate, which
promotes consumption, became popular as the natural gas industries began
to face competition with electricity. Despite such transition in rate
system, utility rate-making traditionally goes through same steps based
on certain criteria as follows;(1)Determination of the acceptable level
of costs to be applied to the rates, (2)Determination of a fair rate of
-23-
F[ABI 9. MAJOR CHANGE IN INIERSTATE PIPELINE RATE DESIGN
Y.AR
RATi DESIGN
DEMAND CHARGE
1952
1973
[tiAUAKfIC SEABOARD]
ONE-PART DEMAND CHARGE
---
1983 1983-
INITEHD]
ONE-PART DEMAND
[(MODIFIED FIXED VALUABLE]
(MFV)
MCHARGE TWD-PART DEMAND CHAGE
~
* 50% of fixed costs allocated *25% of fixed costs allocated 50%of fixed costs (minus
to deand charge
to demnd charge
the return on equity and
* 50% applied to commodity
* 75% of fixed costs allocated related income taxes are
charge
to demnd charge
recovered through a peakday demad charge
*
FIXED COST
1989A
1992
--
tSZrIGfr FIXED VALUABLIE
[MWDIFIED FIXED VALUABLE
(
02 ARGE) ] (wV' )
fwrf
(SFV)
ONE-PART DEMND ICHARGE ONE-PART DEMAOD
IARGE
* All fixed costs except the * All fixed costs are recovered
return on equity and related tUrough the peak-day dmnd
charge.This includes some
income taxes are recovered
fixed costs such as return on
through a peak-dny demund
equity. related taxes. long-tera
charge
debt which were previously
recovered as a commdity chare
under MV
Valuable costs allocated
to caomdity charge.
--
VALUABIE COST
* Valuable costs allocated
* Valuable costs allocated
totally to comodity charge. to comodity charge.
(Later modified so that 100
of fixed production costs
were allocated to cAmmodity
chare.)
I)ltcb h cost. incurrence
POI.ICY RATIONALE
with cost responsibility
Enmsure just and reasonable
rates under the. NGA
)Conserve available gas
supplies
lMatch cost incurrence
with cost responsibility
)Ensure just and reasonable
rates under the NGA
* Valuable costs allocated
* Valuable costs allocated
to comodity charge.
to coemodity charge.
In addition .the return on
In addition .the return on
equity and related taxes
equity and related taxes
are also recovered through
are also recovered through
the comodity chare.
the coedity dcharge.
1)Maximize pipeline throughput DTramition period to openaccess and the decontrol of
Enable gas to compete more
effectively with alternatiw natural gs wellhead price
under the NGPA is over
fuels such as oil
.Ensure just and reasonable ZDZ dcarge no longer needed
rates under the NGA
to soften the impact on
low load factor customers ol
the shift of fixed costs
from the commodity charge
to the demnd chdge
Enseure Just and reasonable
rates under the NGA
W
I
(NUIT) D2=ANNUAI. DEMAND IAR(;E
(SOURCE) DWPAIfhW•NT OF IFJINlGY/EJNERGY INFOIMATION AIMINISTRATION.' NA11URAL GAS 1992 -ISSUES AND TRENDS-' etc.
d
DPrtmote competition at
the wellhead
)Facilitate creation of
national market for gas
3Promote nondistortionary
price signals
&Enoure just and reasonable
rates under the NGA
return on shareholder investment, (3)Allocation of costs to differ
customer classes, (4)Development of rates from allocated costs and
forecasted sales levels. In Massachusetts for example, DPU suggests
several goals for utility rate;efficiency, simplicity, continuity,
fairness and earning stability.
However, these traditional framework of resale rate regulation
has faced competitive pressure from the drastic environmental change in
the market. The collapse of the oil price in early 1980's pushed large
industrial customers to shift from natural gas to alternative fuels,
especially, oil. As a result, uniform regulatory system both small
captive customers and large customers who can easily shift their fuel
mix to alternatives had been unable to meet the new competitive market.
These pressure required a competitive rate-making for large industrial
customers. Furthermore, FERC propelled open access transportation so
strongly that many of the large customers made contracts directly with
producer, interstate pipelines companies (FIGURE 9). This also required
LDCs to have more flexible and diversified rate-making to cope with
competition.
(3)Competitive ratemaking in resale rate
Then, how was the competitive rate made concretely ? First, as
TABLE 10 shows, customers are classified into three groups, residential,
commercial, industrial according to demand characteristics, such as
demand elasticity or distribution cost etc. Then, they are divided into
core customers and non-core customers. Non-core customer are mainly
constituted of large industrial customers and power generators. They
usually have a capability to switch on short notice to alternative
fuels, large scale demand per meter, and adjustable load factor. It is
also a characteristics that they have a big bargaining power against
LDCs. The basic concept of competitive rate-making is to subdivide the
service and to set the gas rate according to each service variety.
Particularly, non-core customers have energy needs so much more complex
than core customers that the service for them are diversified into
categories such as short-term contracts or long-term ones, firm
transportation or interruptible. Therefore, gas rates are also
diversified according to the service (ENDNOTE 11). From non-core
customers' standpoint, they can choose the combination of price and
supply stability to meet their needs.
-25-
FIGURE 9.
GAS UTILITY INDUSTRY TOTAL SALES
AND TRANSPORTATION VOLUMES
ThILLION OF BTU
20, 000
20, 000
15.000
15.000
10.000
10,000
5,000
5. 000
0
1975
1980
1985
CALENDER YEAR
1990
1991
0
D
SALES El TRANSPORTATION
(SOURCE)AMERICAN GAS ASSICIATION.'GAS FACTS '92'
(NOTE)1990 is the first year 'TRANSPORTATION
VOLUMES" are reported.
TABLE 10. CUSTOMER REWUIREETS BY END-USE SECTIOR
IResidential Camercial
native
....
t....iv. ...
ss :
...... ..no
Industrial
Electric
tility
.........
•........
..... ....... y ....... .......y .......
lonwph
hi$.
Fuel-switc~ingiapi ity
hihii
nodeate
low
Purchasin6 options.............
I_.__oZ
Z
. .II
.
. ... .............. ........ .I..... low
.- ....... ....... low
. ... ..... reliability
.
.................
Service
Plannin horizon ............... ..j.q te.. ju.l terU .sort-tew .sbort-term
yr-row d yea-round
sesonal
seasonal
Uge Pattern
Safetreliance
LDC
IC
self
self
(SOURCE)Exective Enterprise. Inc.." Natural Gas'
-26-
TABLE 11 shows revenue requirement of Boston Gas in Massachusetts
by class of customers. A rate table is developed based on this revenue
requirement. As to the rate regulation for large industrial customers,
it is basically unregulated. So, what is obliged to LDC is to just
submitting a report to State regulators (DPU, PUC, PSC etc.). However,
when LDCs make contracts with new customers, regardless of whether
inside the franchise or outside, they have to submit some information
including contract contents, load factor, demand scale etc. The major
concerns of state regulators are if costs are fairly allocated among
core and non-core customers based on cost-of-service study. In that
sense, it can be interpreted that regulator's concerns are shifting from
rate level to rate structure in the former traditional rate-making step.
At the federal level, the major purpose of deregulation policies
has been to make the natural gas market more efficient from upstream to
burnertip by introducing competition ;more concretely by abolishing
wellhead price control and promoting open access transportation. On the
other hand, the major concerns of state regulators have been to protect
small customers, which have more captive natures and fewer energy
choices. Therefore, they are promoting competitive rate-making to
prevent a bigger cost burden for small customers by preventing large
customers from dropping off the system and levelizing load factors.
(4)Some measures to prevent cross-subsidization
The same kind of problems with resale price regulation as Japan
suffers from have occurred in U.S. as well. That is how to regulate
cross-subsidization among different class of customers. Actual practice
differs from state to state. But in general, it is regulated based on
the cost-of-service study and the revenue requirement which LDCs submit
to state regulators. So far, it was the general case that rates for
large customers group are set higher than fair cost-based rate to lower
the rates for small customers group as a matter of public policy. In
other words, the small customers' group has generally received cross
subsidization from the large customers group. Recently, however,
increasing competition in the market requires a more cost-based rate
design. Consequently, we can see some cases of cost reallocation from
large to small customer group in new rate applications to the authority.
TABLE 12 shows a rate case of ProvGas in Rhode Island State to apply the
change of rate design. ProvGas applied Rhode Island Public Utility
(RIPUC) to allow them to transfer $ 4.124 million from residential to
non-residential, analyzing by cost-of-service study that actual revenue
-27-
TABLE 11.
REENNUE REQUIREMENT BY RATE CLASS OF 'BOSTON GAS' (1992. Dec)
CLASSIFICATION
RETE
CLASS
RESIDENTI.ALi
R-01
I R-03
DEMAND CHARACTER
i
NON-HEATING
HEATING
i
PEAK
(NOV.-APR.
I
30.659
i
256.209
OFF-PEAK
TOTAL
(MAY.-OCT. ) (THOUSAND S)
23.232
53.891
82.271
338.480
LOW
G-41
SMALL
22. 116 1
6.071
28.187
LOAD
FACTOR
G-42
G-43
MEDIUM
LARGE
25.273
48.048
5.703
10.244
30.975
58.293
G-44
EXTRA-LARGE
28.050
6.007
34.057
7.738
9.305
14,586 i
14.190 1
197
107
79
305
391
5.017
5.268
7.779
6.471
155
118
189
2741
35
12. 755
14.573
22.365
20.661
353
225
268
579
74
HIGH
LOAD
FACTOR
G-51
G-52
G-53
G-54
SUMNER
G-61
LOAD
G-62
FACTOR
I G-63
STREET LIGHTING
G-07
GAS LAMP
G-17
SMALL
MEDIUM
LARGE
EXTRA-LARGE
SMALL
MEDIUM
LARGE
STREET LIGHTING 1
GAS LAMP
(SOURCE)MASSACHUSETTS STATE. DEPARMEWh OF PUBLIC UTILITY
(NOTE)High load factor customers meet the conditions below.
peak season demand< 70% of the year-round demand.
TABLE 12. CUTOMER CLASS REVENUE CHANGES IN 'PROVGAS' (RM)DE ISLAND)
DUE TO REVENUE REAULLOCATION AND RATE INCREASE(1993. 11)
CUSTOMER
REVENUE AT
REVENUE AT
CHANGE IN
REVENUES
CHANGE
RESIDENTIAL
NON-HEATING
$7.202,576
$7.909,576
$700.000
9.7%
CLASS
OLD RATES
NEW RATES
(SOURCE) RHODE ISLAND PUBLIC UTILITY COMWISSION
-28-
from residential customers is $ 10 million lower than fair required
revenue, while that from non-residential is $ 10 million higher. RIPUC
agreed with this argument, approving a $ 2,838 million reallocation.
This doesn't always mean the small customers will face an increase
because Revenue Requirement will be extended to actual rate table,
assuming demand growth or increase of customers,etc. But, it's becoming
common to reallocate the cost from large to small customers group. Here,
regulators' major concerns are how to judge the justice of cost-ofservice study and balance between economic efficiency and social
fairness. This is judged in terms of such criteria as whether the cross
subsidization is fair or unfair in each case. In case of ProvGas, they
are obliged to submit the result of cost-of-service study by March 1995
under the new rate design to be examined by RIPUC as to whether this
cross-subsidization would be fair or not.
It's also necessary to think out some measures to maintain supply
and rate stability. In case of Boston Gas seen in TABLE 11, while extralarge customers such as G54, G44 class may raise the capacity
utilization rate because they have large-scale demand and high load
factors, they can have a negative influence on small customers. For
example if they move to an other customer class or demand more gas than
their contract volume, it would shake the supply stability and put the
cost burden on whole customers. Taking these possibilities into account,
Boston Gas obliged G54, G44 customers to balance actual demand and
contracted demand as best as they can. In addition to that, such
customers are supported to observe some restricted rules such as minimum
contract period, penalty clause in case of nonfulfillment to contribute
LDCs' long-term plan for gas purchasing, building facilities. For
example, Boston Gas gives penalty to G54, G44 customers, who choose
firm-transportaion service, as follows; as to the daily imbalance, when
actual demand excesses contract demand by 10% or 100 MMBTU, customers
have to pay $ 5.00/MMBTU. As to the monthly imbalance, if actual demand
are short of contract demand, customers have to sell their gas with some
discount rate to LDCs depending on shortage extent.
As to the influence on small customers, for example, though
Massachusetts DPU doesn't have clear criteria, they are making every
effort not to increase rate for small customers so rapidly. Moreover,
margin between actual rate and marginal cost is shared by the internal
reserve of the gas companies and core customers. In case of Boston Gas,
they share their margin every 6 months to core customers and internal
reserve at the rate of 1 to 1.
-29-
impacts on natural gas market by deregulation
(5)Major
A
natural
series
gas
decontrol,
of
deregulation
market.
In
the
policies
upstream,
spot market has been expanded.
as
have
a
In
had
result
some
of
impacts
on
wellhead price
transportation sector,
open
access has promoted more variety of transportation service (ENDNOTE 12).
The major changes in the distribution sector are as follows. The
traditional natural gas market was transformed as FIGURE 10 shows.
FIGURE 10.TRANSAC ION PAD&S FOR NAURAL GAS PURCHASES
.---.--------N
•RE
M
R
!...................
,3
Q
i LOCAL
DISTRIBtION
INDUMRIAL.
PRODUCER --
ELCTRIIC UTILITY.
i COMPANY
W
LARGE COMRCIMAL
RESIDrTIAL
SMALL (CMERCIAL
O~SERS
(XSESIZES-
•
PIPELINE
iCOMANY
,
~I
'
............................................
----1 TRADITIONAL PATH
.....---- RECE• LY AVAILABLE PATH
(SOUgcE) ENEoG IN•FWOMATION AMIISTRATION.OFFICE OF OIL AND GAS
The biggest change is that large industrial customers have become
able to bypass LDCs and purchase their gas directly from producers,
pipelines and
marketers. These changes in natural gas purchase paths
have promoted more flexible and competitive rate-making to cope with
market competition. Though it varies from state to state to what degree
competitive rates are introduced, as a whole the LDCs in general, rate
for industrial sector, which is facing with market competition, declined
more than residential and commercial sectors (FIGURE 11). Despite the
rate decline in industrial sector, the number of bypass customers in the
sector has increased rapidly (TABLE 13). As open access transportation
lead the functional change of interstate pipeline
in 1980's has
companies, recent changes in the market circumstances have required LDCs
as well to increase contract transportation service after city gate.
These changes are also affeacting revenue structure (FIGURE 12). It is
expected that LDCs, which are exposed to bypass threat in the market,
would aim for more cost based rate design (ENDNOTE 13). Furthermore,
Order 636 implemented in April 1992 as a final restructuring rule, gives
LDCs wider choice and more responsibility about resource procurement at
the same time.
-30-
FIGURE II.
--
i
GAS UTILITY INDUSTRY AVERAGE
PRICES
BY CLASS OFSERVICE. 1968-1991
158 Si I 1i
12
13 14
115
1
11I
19
e
li
12 53 34 31 i
Ii
II
H
M
Si
CALENDER
TEAR
RESIDENTIAL CONIERCIAL INDUSTRIAL OTHER
(SOURCE)AIERICAN GAS
ASSOCIATION.'GAS FACTS '92
(NOTE)' INDUSTRIAL' includes electri, senertion
TABLE 13. TRANSPORTATION VOLUMES DELIVERED TO END USERS 1987-1990
(UNIT:MCF)
CALENDER TOTAL DELIVERED
GROWI-i
YEAR
T
TO CUSTDMERS
INDUSTRIAL
CUSTOMERS
GRGDWI
SHARE
(%)
()
I()
1987 1
1988
1989
1990
5.5
4.8
-1.6
15.468.385
16.319.793
17.101.615
16.826.244
3.070.103
3.663.187
4.297.692
4,483.269
19.3
17.3
4.3 ,
ELECTRIC
GENERATION
()
19.8
22.4
25.1
26.6
917,322
1.076.253
1.152.181
1.394,785
(SOURCE)AERICAN GAS ASSOCIATION.'GAS FACTS '92'
FIGURE 12.
I
--
L
REVENUE
SHARE
OFGASUTILITY INDUSTRIES
BTCLASS OF SERVICE. 1968-91
- ONS
um
0
IMII U
13 TI 12 73 14 T 11
ll
CALENDER TEAR
7Ti 1
13 3
2II ,33
l8 1 69
SREIDSIDENITIAL
0 COMIIECIAL D0 INDUSTRIAL
ISOURCE)AIERICA.N GAS
ASSOCIATIII.'GAS FACTS
'92'
INOTE)For 76 and be)ood Ill electric elleration
si;cleded i llINDUSTRIAL'
calesor,.
-31-
GROWPM
SHARE
I
91
3 a60 I
O OTHER
17.3
7.1
21.1
(%)
5.9
6.6
6.7
8.3
Thus, a series of deregulation policies implemented by FERC in
the 1980's have surely come down from upstream to downstream.
Consequently, in 1990's LDCs would face a new market environment and
state regulators require a new regulatory framework.
6.Summary
At the end, I'd like to see some problems of Japanese city gas
utilities
from
broader
horizons
longer
and
term
standpoint.
Administrative Inspection of Energy Industries, which was released in
August 1993 is very useful to view them. The Inspection indicates that
natural gas demand is expected to increase in commercial and industrial
sectors, and consequently it will be an important energy resource.
Accordingly,
it emphasizes
the
importance
to
improve
supply
infrastructure to meet the demand. Furthermore, it is also stressed to
make a long-term or 20-year-long demand forecast of whole gas industries
like electricity industries to plan supply infrastructure, including LNG
receiving terminals or pipelines etc. It is also mentioned that problems
in complex law system about pipeline development can hinder smooth
improvement of them (ENDNOTE 14).
The second problem raised is about supply stability. To secure
supply stability, it's necessary for gas utilities ti cooperate with
each other. The Inspection indicates that there be certain benefit from
cooperation; cooperation between local small utilities can produce
economies of scale, that between large scale and local small scale
utilities can contribute improvement of supply stability in local area,
that between large scale utilities each other can lead to wider area of
operation of city gas industries.
The third point mentioned in the Inspection is in respect to how
to cope with new incremental demand. More concretely, it pointed out
importance to apply more flexible rate system ; to promote deregulation
for large industrial customers, to extend the application of load
adjustment contract, to simplify rate authorization process from caseby-case to comprehensive one and to diversify rate menu to meet customer
needs etc.
Lastly, I would like to summarize the whole description as
follows. In Section 2, it was concluded that the significance of natural
gas in terms of both energy supply situation and energy policy has
-32-
increased as a result of environmental change. Consequently, it was
stressed that gas utilities should play an important role to supply
natural gas to customers. Section 3 pointed that to improve economic
efficiency by introducing the principle of competition and easing some
public regulation are required not only in gas utilities fields, but
also in whole Japanese economy to change it's economic nature. It was
also mentioned about the necessity to ease rate regulation, which is
typical economic regulation. Section 4 focused on the rate reform for
large industrial customers. More flexible rate-making for large
industrial customers can benefit them directly through rate decline.
It's not only large customers who can be expected to have a benefit, but
also gas utilities and small customers through the improvement of
capacity utilization and the fall of total average cost. The measures to
prevent cross subsidization were raised as a future problem. Section 5
briefly reviewed the deregulation history in the U.S. natural gas
industries. The first lesson from them is that once a deregulation
started in some area, it promotes another deregulation subject through
market power, as wellhead price decontrol in upstream promoted open
access transportation in pipeline sector next, and is affecting LDCs
function finally.
The second lesson is that major concern and importance of state
regulators are changing. Traditional regulatory system imposed uniform
balance toward both small and large customers. But the traditional
framework had become unable to cope with the new reality of competitive
markets. Thus, state regulators have come to be concerned with
maintaining fair competitive conditions in non-core customers market,
and checking the influence from non-core to core customers. In Japan as
well, as a result of rate reform for large industrial customers, the
traditional regulatory framework field and competitive field will
coexist. The new regulatory concerns will be how to judge the fairness
or unfairness of cross subsidization, how to regulate unfair cross
subsidization, how to verify the benefits for small customers.
The third is that deregulation means not only less intervention
by government to gas utilities, but also the process of restructuring
the existing industrial structure (ENDNOTE 15). In the U.S. natural gas
;production,
function
each
separated
originally
industries
transportation, distribution. In the process of deregulation, however,
each services have been more diversified as we saw in Section 5. The
deregulation process may mean restructuring for Japanese gas utilities.
-33-
As we
interpreted as
is also posing
direction they
discussed above, going deregulation trend should be
a trigger of restructuring process. At the same time, it
bigger questions, what gas utilities ought to be, in what
should go in the coming new era.
-34-
-
ENDNOTE--
1. Committee for Gas Fundamental Issues in Subcommittee on Urban Energy
did not include any numbers from rival industries such as electric
industry, oil industry, LPG industry. Therefore, it was reorganized
to Committee fro Gas Policy Issues, which is now considering
desirable supply system of gas utilities, including deregulation
policy.
2. In the Gas Utilities Industry Law, general gas suppliers and
community gas suppliers are defined as follows respectively ;"It's
the general gas supplier which supplies city gas responding to
public demand through pipelines", "It's the community gas supplier
which supplies gas through simplified gas facilities and has less
than 70 customers per one supply point".
3. This paper focuses on rate reform for large industrial customers.
Besides, general rate reform is also in consideration. Actually the
Economic Reform Advisory Group suggested in the interim report that
introduction of price cap regulation should be reconsidered, which
is already adopted in U.K electric and gas industry.
4. NIKKEI NEWSPAPER's article in January Ist 1994 reported that MITI
determined concrete deregulation policies toward city gas utilities.
It said that "MITI will change rate-making process for large
customers which consume over 2 million cubic meter per year from
authorization to report. At the same time, it will be allowed for
city gas utilities to supply gas beyond their franchise, which are
supplied by LPG companies. Gas Utilities Industry Law is supposed to
be amended by fiscal 1994".
5. See reference, Masu Uekusa "Economics of public regulation"
6. In economic regulations in practice, cross subsidization is
sometimes allowed as fair in terms of public policy. For example,
local railway routes in the red are often subsidized by urban routes
in the black. Another example of cross subsidization can be seen in
telephone companies setting a uniform rate between dense demand
areas and low demand areas of local exchange services.
7. In the economic theory, incremental test is usually used as a
criteria for unfair cross subsidization.
8. See reference, "Energy Forum" September, 1993.
9. In 1990, the number of producers, interstate pipeline companies and
LDCs are approximately 8000, 2300 (including big 22 companies, which
occupy 85% in transportation), 3000 respectively.10.
-35-
10.
11.
12.
13.
14.
15.
Regulatory authority for interstate pipeline business was Federal
Power Commission (FPC) when Natural Gas Act went effect in 1938.
After that, FERC succeeded FPC's authority when it was established
as an independent
organization from Department of Energy by The
Department of Energy Organization Act in 1977.
Rate menu is also diversified for small residential customers as
well. Colonial Gas, Cape Cod Division in Massachusetts has a summer
seasonal rate except heating, non-heating in residential class, Cape
Cod is typical mecca for the vacation season. Therefore, there are
strong needs from customers who use their second house only in
summer vacation season.
Open access transportation since 1980's has promoted functional
change and diversification of distribution and transportation
services. Before Order 436 implemented in 1985, almost all the gas
for large industrial customers were distributed by LDCs, but in 1990
LDCs are occupying just 40% , while production companies and
interstate pipelines share about 20% respectively. At the same time,
contract transportation has also increased rapidly. In 1991 as much
by interstate pipelines were
as 84% of the transported gas
contracted gas.
In April 1993, Boston Gas got an approval of marginal-cost-pricing
by Department of Public Utilities, Massachusetts.
The Administrative Inspection pointed that different laws are
applied depending on builder and the purposes for building a
pipeline ;if electric utilities build pipelines for power generating
facilities, they are under control of "Electric Utilities Industry
Law" ;in case for domestic natural gas transportation, it's
regulated by "Mining Industry Law" ;in case of gas utilities
regulated by "Gas Utilities Industry Law"
transportation, it's
off-gas transportation from chemical
;in other cases such as
factories, it's under "High Pressure Gas Control Law".
A BOSTON GLOBE article in 14th December 1993 hints that mergers and
acquisitions between LDCs may possibly happen. The article mentioned
that gas rate in Massachusetts is one of the highest standard in
U.S. It pointed out this is not only due to the long transportation
distance but also due to operation inefficiency such as duplicated
investment and so on. According to Boston Gas's estimation, it's
possible to save the cost as much as $ 100 million or 8% of whole
gas sales amount. $ 1,3 billion, in the State by consolidating gas
utilities in Massachusetts.
-36-
-
REFEREWCE -
l."The economics of public regulation" Masu Uekesa, 1991, Chikuma Shobo
2."Public Rate in Japan", Shusaku Yamaya, 1992 Denryoku Shinposha
3."Public Utilities and deregulation", Toshihiko Hayashi, 1990,
Toyo Keizai
4."Report on North America Gas Industries" 1993, Inquiry Group of North
American Gas Industries
5."History and perspective of energy policies",, Agency of Natural Gas
Resources and Energy
6."Energy Forum", Denryoku Sinposha
7."Japanese city gas industries", Japan Gas Association, 1985, Diamond
Co.
8."Deregulation", Council for administrative Reform
9."Regulation and competition of public utilities", 1989 Denryoku
Shinposha
10."Natural gas 1992 -Issues and Trends-", March 1993 ,Department of
Energy / Energy Information Administration
11."Legal summary and Outlines of FERC Order 636 "
12."Public Utility Fortnightly"Public Utilities Reports.Inc
13."The regulation of public utilities",1993, Charles F.Phillips Jr.,
Public Utility Reports, Inc
14."The potential for Natural Gas in the United States", 1992, National
Petroleum Council
15."Regulation (1993 WINTER), -The new age of natural gas- ", CATO
-37-