Annual Report of. Electricity and Gas Market Surveillance Commission. (September 2016 August 2017)

Transcription

1 (Tentative translation) Annual Report of Electricity and Gas Market Surveillance Commission (September 2016 August 2017) November 2017 Electricity and Gas Market Surveillance Commission NOTE: This is an English translation of the Annual Report of Electricity and Gas Market Surveillance Commission (September 2016 August 2017). It should be noted that the original Japanese text will prevail over the English in case of conflict. 1

2 Pursuant to provision of Article of the Electricity Business Act (Act No. 170 of 1964), we announce the processing status of administrative work of Electricity and Gas Market Surveillance Commission for the period from September 1, 2016 to August 31, November 30, 2017 Electricity and Gas Market Surveillance Commission Chairman, Tatsuo Hatta, Ph.D. 2

3 Annual Report of Electricity and Gas Market Surveillance Commission Table of Contents Introduction Section 1 Section 2 Section 3 Electricity and Gas Market Surveillance Commission Role Organization Body Chapter 1 Section 1 Section 2 Section 3 Section 4 Section 5 Section 6 Section 7 Section 8 Strict and fair surveillance, etc. to ensure fair trade in the electricity market Assessment of competitive situation in the electricity market Market trend after full liberalization of the electricity retail market Qualification screening for registration of electricity retailer and retail service by Specified Electricity Transmission and Distribution Utility Administrative Guidance, etc. for electricity retailers Regarding surveillance on wholesale sectors Administrative Guidance, etc. for general transmission and distribution utility Post facto assessment of retail electricity rate after the end of the cost finding period Audit Chapter 2 Section 1 Section 2 Section 3 Section 4 Section 5 Section 6 Section 7 Section 8 Efforts for higher efficiency of the electricity market and promotion of competition Environmental improvement for negative watt trade Regarding open procurement system for procurement of balancing power Regarding imbalance analysis Regarding activity regulation in association with legal unbundling Regarding allocation of maintenance and operation cost of power transmission and distribution grid aimed for efficiency improvement Regarding activation of wholesale electricity trade Regarding report on voluntary efforts and monitoring Revision of Guidelines on Electricity Retail Business Chapter 3 Section 1 Section 2 Section 3 Efforts, etc. toward full liberalization of the gas retail market Qualification screening for registration of gas retailer Designation of utilities on which transitional regulated tariff is imposed Assessment of the Wheeling Service provisions Chapter 4 Section 1 Section 2 Section 3 Strict and fair surveillance, etc. to ensure proper trade in the gas market Assessment of competitive situation in the gas market Administrative Guidance, etc. for gas retailers Administrative Guidance, etc. for general gas pipeline service providers 3

4 Section 4 Section 5 Audit Trend of heat supply business Chapter 5 Section 1 Section 2 Section 3 Efforts for higher efficiency of the gas market and promotion of competition Regarding post facto assessment of gas transportation service rates Development of Guidelines on Gas Retail Business Revision of Guidelines for Proper Gas Trade Chapter 6 Section 1 Section 2 Section 3 International collaboration, dispute resolution and public relations Efforts for enhancement of collaboration with international organization Dispute resolution Efforts for public relations 4

5 Introduction Section 1 Electricity and Gas Market Surveillance Commission In conjunction with the implementation of electricity system reform based on the Act on the Partial Revision of the Electricity Business Act, etc. (Act No. 47 of 2015, hereinafter referred to as the 3rd Step Revision of Act ) which came into effect in 2015, the Electricity Market Surveillance Commission was established on September 1, 2015 as a regulatory organization with independence and high level of expertise under direct control of the Minister of Economy, Trade and Industry in order to strengthen functions such as surveillance of proper electricity trade and to take necessary measures to ensure proper electricity trade. Since April 1, 2016, roles relating to gas business and heat supply business have been added and the name has been changed to the Electricity and Gas Market Surveillance Commission (hereinafter referred to as Commission ). The Commission is composed of a chairman and four commissioners. They are appointed by the Minister of Economy, Trade and Industry from experts with professional knowledge and experience in laws, economics, finance or engineering with the ability to make fair and neutral decisions in relation to their duties, and are required to exercise their authorities independently. (Chairman) Tatsuo Hatta, Ph.D. (Commissioners) Ryuichi Inagaki [Names of Commissioners] President, Asian Growth Research Institute Professor Emeritus, Osaka University Attorney-at-law, Ryuichi Inagaki Law Office Yasuhiro Hayashi, Ph.D. Professor, Graduate School of Advanced Science and Engineering, Waseda University Masanori Maruo Managing Director of SMBC Nikko Securities Inc. Emiko Minowa Certified Public Accountant, Partner at Deloitte Touche Tohmatsu LLC * Occupations and titles in the above are as of August

6 Section 2 Role 1. Strict and fair surveillance The Commission conducts strict and fair surveillance by means of audits, collection of reports, on-site inspections and so on to secure the protection of interests of electricity and gas consumers and to ensure sound competition between existing utilities and new entrants. In the event of inappropriate activity by any utility, the Commission will make a recommendation of its own to such a utility and, in addition, may recommend the Minister of Economy, Trade and Industry to issue an order to such a utility for business improvement. <Examples of activity to be put under surveillance> (Activities in relation to sound competition between the general electric utility or the general gas utility, etc. and new entrants) Activity by a major utility to offer a significantly low retail rate against new entrants Activity by a major utility regarding selling bid to Japan Electric Power Exchange (hereinafter referred to as JEPX ) to limit the bid volume or to set the bid price high without justifiable grounds Activity to prioritize one s own power plant or production facility over the facilities of new entrants regarding the connection to the network Activity to tell information about new entrants obtained through the network-related business to its own business operation sector (Activity in relation to protection of interests of consumers) Activity to charge an extraordinary amount of cancellation money in response to a proposal for contract termination by a consumer Activity to solicit a contract by providing consumers with insufficient or false information on rates, contract term and cancellation money 2. Comments, Recommendations and proposals The Commission submits comments, recommendations and proposals to the Minister of Economy, Trade and Industry regarding development of new rules, etc. that are necessary to ensure fair trade and to promote sound competition in the market. 6

7 [Roles of the Commission] Ministry of Economy, Trade and Industry Measures based on comments provided by the Commission Guidance and supervision Report Minister of Economy, Trade and Industry Comments, Propositions Electricity and Gas Market Surveillance Commission [1] Development of rules [2] Disposition of utilities [3] Approval, etc. for the General Provisions for Supply Regional Bureaus of Economy, Trade and Industry, etc. Market Surveillance Office To ensure fair trade of electricity, gas and heat To ensure neutrality of network sectors (implementation of activity regulation) Application of rules on trade surveillance and activity regulation, etc. (collection of reports, on-the-spot inspections, recommendation to utility, mediation/arbitration and so on) Electricity, gas and heat market (electricity generation utility, electricity transmission and distribution utility, electricity retailer, gas production utility, gas pipeline service provider, gas retailer, heat supply utility and so on) 7

8 Section 3 Organization The Commission has its exclusive Executive Bureau consisting of the Policy Planning Division, the Market Surveillance Division, the Wholesale Market Surveillance Office (reorganized to the Market Policy Planning Office on September 1, 2017), the Network Surveillance Division and the Network Policy Planning Office. The Regional Bureaus of Economy, Trade and Industry, etc. of each region also have a Market Surveillance Office. The Network Policy Planning Office was established under the Network Surveillance Division in September In addition, as of the end of August 2017, three specialized meetings (i.e., the Specialized Meeting for Policy Design, the Specialized Meeting for Fee Examination and the Specialized Meeting for Tender for Thermal Power Source) have been established under the Commission, and the Working Group for the Cost sharing system for Power Transmission and Distribution has been established under the Specialized Meeting for Policy Design. [Organization Chart of the Commission] Minister of Economy, Trade and Industry Electricity and Gas Market Surveillance Commission Chairman (1) Commissioners (4) Executive bureau Secretariat General Policy Planning Division Market Surveillance Division Wholesale Market Surveillance Office* Network Surveillance Division Network Policy Planning Office Bureaus of Economy, Trade and Industry Hokkaido Bureau of Economy, Trade and Industry, Electricity and Gas Market Surveillance Office Tohoku Bureau of Economy, Trade and Industry, Electricity and Gas Market Surveillance Office Kanto Bureau of Economy, Trade and Industry, Electricity and Gas Market Surveillance Office Chubu Bureau of Economy, Trade and Industry, Electricity and Gas Market Surveillance Office Hokuriku Branch, Electricity and Gas Business, Electricity and Gas Market Surveillance Office Kinki Bureau of Economy, Trade and Industry, Electricity and Gas Market Surveillance Office Chugoku Bureau of Economy, Trade and Industry, Electricity and Gas Market Surveillance Office Shikoku Bureau of Economy, Trade and Industry, Electricity and Gas Market Surveillance Office Kyushu Bureau of Economy, Trade and Industry, Electricity and Gas Market Surveillance Office Okinawa General Ex ecutive Bureau, Economy and Industry Department, Electricity and Gas Market Surveillance Office * Wholesale Market Surveillance Office was reorganized to Market Policy Planning Office in September

9 [Past Record of the Commission Meeting and the Specialized Meeting] Name of Meetings Timing of Meeting Number of Times of Meeting (As of the end of August 2017) Electricity and Gas Market Started from September 1, 101 times Surveillance Commission 2015 Specialized Meeting for Started from October 9, times Policy Design Working Group for the Cost sharing system for Power Transmission and Distribution Specialized Meeting for Fee Examination Specialized Meeting for Tender for Thermal Power Source Started from September 16, 2017 Started from September 4, 2015 Started from December 22, times 25 times 4 times 9

10 Chapter 1 Strict and fair surveillance, etc. to ensure proper trade in the electricity market Section 1 Assessment of competitive situation in the electricity market (1) Past record of switching to new electric entrants, etc. According to the Electricity Trading Report of June 2017, the number of consumers who switched their supplier to a new electric utility (i.e., electricity retailers other than the general electric utilities, the same shall apply hereinafter) reached 6.0% of the consumers all over the country in the markets that were newly liberalized by the full liberalization of the electricity retail market. The number of consumers who decided to take the Free Choice Rate Plan, which had been set up by the general electric utilities, also reached 4.6%. Namely, 10.6% of the consumers in total switched to the Free Choice Rate Plan. [Past Record of Switching of Electricity Supplier to New Electric Entrants (as of August 2017)] Number of cases of switching (to other company) of each region Region Hokkaido Tohoku Tokyo PG Chubu Hokuriku Kansai Chugoku Shikoku Kyushu Okinawa Throughout Japan Number of Cases of Switching to other Company [unit: 10 thousand cases] Rate* [unit: %] Number of cases of switching within the same company of each region Hokkaido Tohoku Tokyo PG Chubu Hokuriku Kansai Chugoku Shikoku Kyushu Okinawa Throughout Japan Number of Cases of Switching within the same Company [unit: 10 thousand cases] Rate* [unit: %] (Source) Electricity and Gas Market Surveillance Commission, Electricity Trading Report (Record as of August 2017) * Preliminary calculation based on number of contracts of general household, etc. as of March 2016 (approx million). The total number of contracts for low voltage electricity as of March 2016 is approx. 86 million. However, pay attention to the fact that contracts for the former General Provisions for Selection and public streets, etc., which are actually not supposed to be switched, are excluded from the parameter. When one consumer changes the supplying utility and/or changes the contract type between the regulated rate of the general electric utilities and a free choice rate plan multiple times, such changes are counted every time for each change. The share of new electric entrants is increasing also in the extra-high and high voltage category after the full liberalization. As a result, the share of new electric entrants has reached approximately 11.4% of the entire electricity market. 10

11 [Market Share of New Electric Entrants (August 2012 August 2017)] Market Share of New Electric Entrants (August 2012 August 2017) Extra-high/high voltage (electricity sold by by new electric entrants) Share of of new electric entrants in in total demand Extra-high/high voltage (electricity sold by by utilities other than new electric entrants) Share of of new electric entrants in in extra-high voltage and high voltage sector Low voltage (electricity sold by by new electric entrants) Share of of new electric entrants in in low voltage sector Low voltage (electricity sold by by utilities other than new electric entrants) Share of of new electric entrants in in extra-high/high voltage: 15.0% (as (as of of August 2017) Volume of electricity (million kwh) Share of of new electric entrants in in total demand: 12.1% (as (as of of August 2017) Share (%) Share (%) Share of of new electric entrants in in low voltage sector: 6.8% (as (as of of August 2017) August 1, 1, February 1, 1, August 1, 1, February 1, 1, August 1, 1, February 1, 1, August 1, 1, February 1, 1, August 1, 1, February 1, 1, August 1, 1, 2017 Source: Survey of the Electric Power Statistics and Electricity Trading Report (2) Diversification of Rate Plans When we look into the rate plans provided by new electric entrants, as an overall trend, many of them are similar to or based on conventional rate plans, which are two-part tariffs composed of a basic rate and a metered rate, and include adjustment for fuel cost fluctuations. On the other hand, some of them have also been offering new rate plans such as a full metered rate plan, flat rate plan, and discount plan for a specified time slot. Likewise, some electricity retailers are entering into the market by emphasizing appealing points to acquire customers, such as power source composition using renewable energy or the locally produced electricity for local consumption. Among those new entrants, there are also some distinctive electricity retailers that offer a financial incentive to a power plant based on the number of votes by consumers. In addition, services such as visualization of power consumption (visualization of electricity using status) and a watching service for family members are being offered by utilizing the data on consumption status of electricity. Different services utilizing the appeal of consumers tastes and sense of value, such as a relationship with a sports team whom the retailer supports, conservation of landscapes of village forests, and others, have also begun to be offered. As for the number of new entrants by region, many electricity retailers have newly entered into the market in urban areas such as Tokyo, Chubu region (Central Japan), Kansai region and Kyushu region for low voltage power supply. In the regions of Hokuriku (Toyama Pref. and Ishikawa Pref.) and Shikoku (Kochi Pref., 11

12 Tokushima Pref., Kagawa Pref. and Ehime Pref.), the number of electricity retailers who are supplying electricity tends to be relatively low. [Electricity Retailers Having Supply Record of Electricity to General Households (by prefecture)] Electricity Retailers Having Supply Record of Electricity to General Household (by Prefecture) Hokkaido Aomori prefecture Iwate prefecture Miyagi prefecture Akita prefecture Yamagata prefecture Fukushima prefecture Ibaraki prefecture Tochigi prefecture Gunma prefecture Saitama prefecture Chiba prefecture Tokyo Metropolis Kanagawa prefecture Niigata prefecture Toyama prefecture Ishikawa prefecture Fukui prefecture Yamanashi prefecture Nagano prefecture Gifu prefecture Shizuoka prefecture Aichi prefecture Mie prefecture Shiga prefecture Kyoto prefecture Osaka prefecture Hyogo prefecture Nara prefecture Wakayama prefecture Tottori prefecture Shimane prefecture Okayama prefecture Hiroshima prefecture Yamaguchi prefecture Tokushima prefecture Kagawa prefecture Ehime prefecture Kochi prefecture Fukuoka prefecture Saga prefecture Nagasaki prefecture Kumamoto prefecture Oita prefecture Miyazaki prefecture Kagoshima prefecture Okinawa prefecture Source: July 2017 Survey of Electric Power Statistics, Agency for Natural Resources and Energy (3) Assessment of competitive situation in the electricity market Regarding the assessment of the competitive situation like the foregoing, the basic policy and details of implementation were summarized by the Specialized Meeting for Policy Design on November 1, Thereafter, analysis was conducted on the results from the Electricity Trading Report, interview with business firms and consumers questionnaire, and discussions were made in the Specialized Meeting for Policy Design on January 26, Then the summary was formulated in the Specialized Meeting for Policy Design on March 31, Generally, it was appreciated that the market share of new electric entrants in the field of low voltage power supply had been steadily increasing since FY2016 and that such an increase represented a certain level of achievement from the electricity system reform, such as an increase of newly entered electric entrants and the diversification of electricity rate plans. On the other hand, however, the extent of the development of reform is not satisfactory yet. For example, competition between regions by general electric utilities and the level of activation of the wholesale electricity market, etc. are not yet sufficient. Therefore, it was acknowledged that there still are many points that need further progress. 12

13 Section 2 Market trend after full liberalization of the electricity retail market To activate competition, it is important that enough volume of trade is secured in the wholesale electricity market. The trade volume at JEPX has substantially increased compared with the previous year by increased volume of buying bids by new electric entrants associated with full liberalization of the electricity retail market as well as by the improvement resulting from voluntary efforts of the general electric utilities. The trade volume of JEPX in FY2016 (from April 2016 to March 2017) exceeded 20 billion kwh for the first time since its opening in 2005, and accounted for 5% of total electricity being sold as of the end of June Since September 2016, intensive discussions have been held in the Subcommittee on the Policy for Accomplishment of Electricity System Reform, which was established under the Strategic Policy Committee, the Advisory Committee for Natural Resources and Energy, and an interim report was formulated. Based on the report, a policy to create a base load power source market was developed as a measure for activation of the wholesale electricity market to further promote the entry of new electric entrants. This policy aims to open up access to sources of low-cost base-load electricity such as coal fired, hydro and nuclear power sources, most of which are practically owned by the general electric utilities currently, and, therefore, is a policy to facilitate new electric entrants access to power sources for the promotion of competition. The general electric utilities also announced in the Specialized Meeting for Policy Design in November 2016 that, based on reference cases in overseas, they would launch gross bidding, by which a part of in-house trade is performed through JEPX, from FY2017. Such efforts are made in addition to the general electric utilities voluntary improvement efforts, such as provision of surplus electricity to JEPX which has been implemented since Such movements are meaningful in terms of the transparency and efficiency of trade, improvement of liquidity and price index nature of trade at JEPX and so on, and have already been implemented in the U.K. and in North Europe, etc. Every general electric utility has announced that it would start the gross bidding in the early part of FY2017 so that approximately 10% of its electricity sales would be traded through JEPX within a year or so, and that it would thereafter continue its efforts to increase the trade volume. 13

14 [Trends of Share of JEPX Trade Volume (Contracted Volume) (April 2012 June 2017)] Total electricity demand (million kwh) Total electricity demand Share of electricity Traded at JEPX (contracted volume of electricity) Share of JEPX Trade: 5.0% (as of June 2017) Share of electricity traded at JEPX (contracted volume of electricity) (%) Voluntary efforts April 2012 October 2012 April 2013 October 2013 April 2014 October 2014 April 2015 October 2015 April 2016 October 2016 April 2017 Year-to-year comparison of Share of electricity traded at JEPX (contracted volume) April May June July August September October November December January February March April May June 1.4 times 1.1 times 1.3 times 1.3 times 1.5 times 1.4 times 1.4 times 1.4 times 1.8 times 1.7 times 1.8 times 1.7 times 1.6 times 1.9 times 1.9 times 14

15 Section 3 Qualification screening for registration of electricity retailer and retail service by Specified Electricity Transmission and Distribution Utility For registration of an electricity retailer, the qualification screening has been conducted respectively by the Agency for Natural Resources and Energy from the viewpoints of potentiality, etc. to secure supply capacity necessary to meet the maximum demand of electricity, and by the Commission from the viewpoints whether it falls under a person who is deemed to be inappropriate for the protection of electricity consumer s interests. [Flow chart of Procedure for Registration and Provisions regarding Qualification Screening for Registration (Abstract)] Flow chart of Procedure for Registration If not joined beforehand in a promotion organization for broad-based operation Procedure to join a promotion organization for broad-based operation [1] Submission of registration application to the Minister of Economy, Trade and Industry [2] Assessment by the Minister of Economy, Trade and Industry [2] Assessment by the Electricity and Gas Market Surveillance Commission [3] Registration and notification by the Minister of Economy, Trade and Industry * Standard processing time is 1 month. <Provisions regarding Qualification Screening for Registration (Abstract)> Electricity Business Act, Article 2-4, Paragraph 1 When an application for registration under Article 2-2 has been filed, the Minister of Economy, Trade and Industry must register the following matters in the registry of Electricity Retailers, except when refusing to register pursuant to paragraph (1) of the following Article: (i) and (ii) (omitted) Electricity Business Act, Article 2-5, Paragraph 1 If a person who has submitted a written application set forth in Article 2-3, paragraph (1) falls under any of the following items, or if the written application or any of the documents accompanying it contains a false statement of an important matter or lacks a statement of an important fact, the Minister of Economy, Trade and Industry must refuse to register the applicant: (i) through (iii) (omitted) (iv) a person who is expected to be unlikely to be able to ensure the supply capability required for meeting the electricity demand of the recipients of the Retail Service, or any other person who is found to be unsuitable for the protection of the interest of electricity consumers. Up until the end of August 2017, 521 applications for registration (506 from electricity retailers and 15 from Specified Electricity Transmission and Distribution Utility) have been received and 435 applicants (416 from electricity retailers and 19 from Specified Electricity Transmission and Distribution Utility) have been registered as a result of screening by the Commission and the Agency for Natural Resources and Energy. 15

16 [Trends of Number of Applications for Registration of Electricity Retailer and Number of Registered Retailers] (cases) August September October November December January February March April May June July August September October November December January February March April May June July August Number of applications Number of registrations Number of deregistration [Remarks] Number of registration means the total number of registration deducted by the number of deregistration (13 cases as of March 31, 2017) and number of deregistration means the number of utilities which submitted notification of abolition of electricity retail business, etc. due to discontinuation or the like of business. Such cases of business discontinuation include but are not limited to the case where the business has been succeeded by someone else. 16

17 Section 4 Administrative Guidance, etc. for electricity retailers Entry to electricity retail business was fully liberalized in April Since then, all consumers including households have the liberty to choose any electric entrants or rate plans they like. Under such circumstances, surveillance, etc. on business activities of electric entrants were conducted in accordance with Guidelines on Electricity Retail Business to enhance appropriateness of trade of retail supply of electricity. Such surveillance includes but is not limited to administrative guidance to utilities that have conducted practices that may be problematic in the light of the Electricity Business Act with regard to information given to consumers and forms/contents, etc. of contracts. Along with implementation of factual investigation and administrative guidance on inappropriate business activities, etc. notified to the Commission s consultation desk, etc., press releases were organized three times during September 2016 to August 2017 in collaboration with the National Consumer Affairs Center of Japan to release information and to present examples of such consultation and advice. (For reference) Implementation status of press release The 7th, on September 1, 2016 Re: Details of consultation up to August 2016 The 8th, on November 16, 2016 Re: Details of consultation up to October 2016 The 9th, on March 30, 2017 Re: Details of consultation up to February 2017 [Status of Consultation from Consumers] Trend of number of consultations regarding Electricity Liberalization with the National Consumer Affairs Center of Japan and Consumer Center Examples of consultation I arranged the switching of electricity utility on the Internet, but received an electric bill from the original utility and found that the switching was not completed. FY2014 April to June 2015 July to September October to December January to March 2016 April to June July to September October to December January to February 2017 When a contract is made, the electricity retailer will deliver a written confirmation. If no written confirmation is delivered, there is a possibility that the contract has not yet been made. I made a contract with a new electricity utility, but have not received an electric bill for months. * Data registered by February 28, 2017 Trend of number of cases of consultation regarding Electricity Liberalization received by the Consultation Desk of the Electricity and Gas Market Surveillance Commission Due to system trouble, etc. of TEPCO Power Grid, Incorporated, cases such as non-delivery of electric bill, etc. have been occurring. Please contact the electricity retailer with whom you made a contract if you need consultation on the payment method or information on the status, etc. September to December 2015 January to March 2016 April to June July to September October November December January 2017 February I applied for switching of the electricity supply contract because I have heard that such switching will lower the electricity charge. However, I am unsure because the original electricity utility stated that I will not be able to return to the original rate plan once the contract is cancelled. With regard to conventional selection provisions of electricity utilities, there is a possibility that the original rate plan cannot be taken again once the contract is cancelled. * Data registered by February 28,

18 Administrative guidance, etc. is provided for the following cases: 1. Inappropriate business activities by electricity retailers [1] Electricity retailer A gave a notice to the Commission in April 2017 of a possibility that an employee of company B who was an agent of A had processed an application for a contract for retail supply of electricity without the consumer s consent. As a result of an investigation, it was found that one employee of B had processed multiple contract applications for retail supply without the consent of the consumers. Based on the result of investigation, and in view of the fact that B could not discover the case regardless of chances to perceive the inappropriate business activities of the said employee from an outstanding business performance of him alone among the employees, the Commission considered that there were problems in the management and supervision of B and gave them administrative guidance to develop and implement preventive measures for recurrence. A was also given an administrative guidance for the prevention of recurrence, etc., though A provided B with an in-depth training course several times which could be considered as reasonable guidance and supervision. 2. Inappropriate business activities by electricity retailers [2] In May 2017, the Commission obtained information that company D who was an agent of electricity retailer C had been providing consumers with false information such as C has a business alliance with the general electric utility. As a result of investigation, it was revealed that multiple employees of D had been presenting the same explanation to consumers in accordance with their Business Talk Manual in which such false information is mentioned. According to D, they had a wheeling service contract with a general electric utility and the purpose of the said statement in the manual was to describe such a fact in a simplified manner. However, such a status is substantially different from what have a business alliance with a general electric utility actually means in general terms. Therefore, the Commission gave administrative guidance to both C and D to revise the description in the manual and instructed them on the prevention of recurrence. 18

19 Section 5 Regarding surveillance on wholesale sectors The Commission has been conducting surveillance in accordance with guidelines such as Guidelines for Proper Electric Power Trade so that an appropriate competitive environment is ensured. TEPCO Energy Partner, Incorporated (hereinafter referred to as TEPCO EP ) offered prices substantially higher than the marginal cost (fuel cost, etc.) at JEPX for daylight hours of weekdays during April to August 2016, and it resulted in inflating contract prices at JEPX in some cases. The Commission considered such an offer to be an action to arbitrarily manipulate the market price, and issued a recommendation for business improvement as of November 17, 2016 to the said company for the prevention of recurrence. Specific details of the recommendation were as follows: (1) Set-up of any selling bid price using the threshold price shall not be conducted in the future. (2) Every person in your company shall be well informed about the above (1), and a necessary and appropriate company structure shall be established to ensure compliance with the same. (3) A report shall be submitted by December 16, 2016 to the Commission regarding specific measures taken within the company for the purpose of above (2). Based on this recommendation, the company developed preventive measures for recurrence as of December 16, 2016 of which the specific details are as follows: (1) The company s in-house manual will have a clear stipulation that selling bid based on the threshold price (a certain level of lower limit of price not based on marginal cost (which cannot be rationalized by supply and demand relationship)) shall not be offered, and the president of the company shall give a direct instruction to the related divisions, departments and sections to observe the in-house manual. (2) A new job position of Coordinator for Bidding Price Control (a management level position) shall be set up in the Internal Audit Dept. of the company, and a person in such a position shall monitor and regularly report to a director in charge to confirm if the trades are performed in accordance with the inhouse manual. (3) To prevent any deviation from the Guidelines on Appropriate Trade, the risk management committee of the company shall conduct monitoring and shall constantly arrange in-house training courses. Since the time when these preventive measures were presented, the Commission has been monitoring the status of implementation of the company s preventive measures continuously. 19

20 Section 6 Administrative guidance, etc. for general transmission and distribution utility With the full liberalization of the electricity retail market in April 2016, meter reading of electricity consumption of each consumer has been conducted under a system where monthly meter reading is done by a general transmission and distribution utility, such as TEPCO Power Grid, Incorporated (hereinafter referred to as TEPCO PG ), which passes such reading information onto electricity retailers. Under such circumstances, delay in the notification to electricity retailers occurred in the same month due to a failure of the information system, etc. of TEPCO PG. This caused a ripple effect such as a delay in the sending of electric bills from electricity retailers to each consumer (approximately 20,000 cases of omission of notification occurred during the period of May to August of that year). Such a trouble was reported to the Commission by TEPCO PG on May 19, 2016, and, in response to the report, the Commission conducted collection of reports on the next day (i.e., May 20) and June 3 requesting for detailed information on the system failure and steps for countermeasures, etc. As a result of investigation by the Commission based on the answers, etc. obtained through the collection of reports, the Commission determined that the trouble falls under the category of the case where issuance of recommendation is considered to be necessary in order to ensure appropriate transactions of electricity as provided in Paragraph 1, Article of the Electricity Business Act, and issued business improvement recommendation dated June 17, The basis of such determination is as follows: (1) The trouble caused as many as approximately 20,000 cases of influence to end consumers. (2) Consumers, who switched electricity supplier to electricity retailer, attributed the delay of electric bills to their switching of electricity supplier. Because of this consequence, it was confirmed that the trouble resulted in giving negative influence to electricity retailers to which the consumers switched electricity supplier, such as depletion of consumers confidence. The specific details of the recommendation are as follows: (Outline of the recommendation for business improvement) Development of a concrete and effective improvement plan (including support for electricity retailers and their consumers) Establishment of a well-prepared organizational structure for implementation of the plan Precise implementation of an improvement plan and periodical inspection and report In response to this recommendation, the said company developed an improvement plan dated July 1, 2016, of which specific details are as follows: (Outline of Improvement Plan) Measures for delay in notification: - recheck of reading data of each meter, etc. Support for electricity retailers and their consumers: - set-up of contact desk exclusively for consumers of electricity retailer, etc. 20

21 Enhancement of business management structure: - enhancement of check function to monitor implementation status of delay elimination measures, etc. Thereafter, the Commission has been receiving status reports on the implementation of the improvement plan twice every month, and has been following up on the issue. In addition, a staff member of the Executive Bureau of the Commission visited the said company twice or so every month to fully grasp the situation and to give administrative guidance concerning problem resolution such as requests for additional measures. On August 26, 2016, the Commission also requested the president of the company to make a presentation on the improvement status as a part of a supportive approach to them. The notice within seven working days, which was an immediate goal of TEPCO PG, has been achieved almost constantly since September Thereafter, they continued efforts for further improvement in aspects of both operation and system. Thus, they have almost materialized a situation of notice within 4 working days since February 2017, except cases with unavoidable reasons. As a result of continued administrative guidance for normalization of the situation, the issues of the said company concerning the delay of notice of electricity consumption as well as the impact on the related utilities and their consumers have almost ceased according to their report dated June 7, It can now be considered that the prospects of future implementation of preventive measures for recurrence have reached a certain level. In view of the foregoing, we decided to end the requirement for report, which had been submitted twice every month until then. Electricity transmission and distribution utility (TEPCO PG) Delay in notification of electricity consumption Electricity retailer Electric bill Payment Consumer 21

22 Section 7 Post facto assessment of retail electricity rate after the end of the cost finding period As for the retail electricity rate based on transitional measures in the Supplementary Provisions of the Act on the Partial Revision of the Electricity Business Act, etc. (Act No. 72 of 2014, hereinafter referred to as 2nd Step Revision of Act ), METI (hereinafter referred to as METI ) is authorized to conduct post facto assessment for every fiscal year after the end of the cost finding period to check needlessly affluent profit margins and to release the results to the public. The Commission conducted the check in FY2016 on the general electric utilities concerning the points of the following A and B: <Points of post facto assessment> A Points to be checked by the Commission regarding post facto assessment on Hokkaido Electric Power Co., Inc., Tohoku Electric Power Co., Inc., TEPCO EP, Hokuriku Electric Power Company, Kansai Electric Power Co., Inc., Chugoku Electric Power Co., Inc., Shikoku Electric Power Co., Inc., Kyushu Electric Power Co., Inc. and Okinawa Electric Power Co., Inc.: The Commission checked if it is necessary for such utilities to apply for an approval for price-cut in accordance with Article 2, Paragraph (7), Item [4] of Assessment Standards, etc. for Administrative action by the Minister of Economy, Trade and Industry based on Supplementary Provisions of the Act on the Partial Revision of the Electricity Business Act ( ANRE No. 12) B Points to be checked by the Specialized Meeting for Fee Examination regarding post facto assessment of Hokkaido Electric Power Co., Inc., Tohoku Electric Power Co., Inc., Kansai Electric Power Co., Inc., Shikoku Electric Power Co., Inc., Kyushu Electric Power Co., Inc., and TEPCO EP (Notes: Profit ratio of electricity business of TEPCO EP s regulated sectors has increased for the last three fiscal years, and the other utilities are described in the work program of the Basic Plan for Consumers as companies subject to post facto assessment within this fiscal year) : Checking was conducted on each of the following items [1] through [3]: [1] Comparison between budget cost and actual cost regarding electricity rate: Are there any individual cost items of which the actual result unreasonably exceeded the budget cost? [2] Comparison of profit margin between regulated sectors and liberated sectors: Is there any significant difference in profit margin between regulated sectors and liberated sectors? If yes, are the causes reasonable? [3] Efforts for enhancement of management efficiency: Is enhancement of management efficiency implemented steadily? * Chubu Electric Power Co., Inc. was exempted from post facto assessment because their cost finding period was not completed. 22

23 <Record of dates of Specialized Meeting for Fee Examination> February 1, 2017 The 22nd Specialized Meeting for Fee Examination February 15, 2017 The 23rd Specialized Meeting for Fee Examination March 1, 2017 The 24th Specialized Meeting for Fee Examination <Results of Post Facto Assessment> A Points checked by the Commission regarding post facto assessment on Hokkaido Electric Power Co., Inc., Tohoku Electric Power Co., Inc., TEPCO EP, Hokuriku Electric Power Company, Kansai Electric Power Co., Inc., Chugoku Electric Power Co., Inc., Shikoku Electric Power Co., Inc., Kyushu Electric Power Co., Inc. and Okinawa Electric Power Co., Inc. During the post facto assessment after the end of the cost finding period, no necessity was confirmed in respect to application for an approval for price-cut in relation to Article 2, Paragraph (7), Item [4] of Assessment Criteria, etc. for Disposition by the Minister of Economy, Trade and Industry based on Supplementary Provisions of the Act on the Partial Revision of the Electricity Business Act ( Material No. 12) regarding the order to apply for approval for revision of the general provisions for general supply, etc. pursuant to the provision of Article 23, Paragraph 1 of Electricity Business Act (Act No. 170, 1964) prior to the revision based on the provision of Article 1 of 2nd Step Revision of Act, which is interpreted and applied as if it is still valid pursuant to the provision of Article 16, Paragraph 3 of Supplemental Provisions of 2nd Step Revision of Act. The details of the assessment are as follows: [1] Criteria based on profit ratio of electricity business As shown in the table below, the profit ratio of each of the seven companies excluding Tohoku Electric Power Co., Inc. and TEPCO EP for the last three fiscal years is smaller than the average profit ratio of the last ten fiscal years of all ten electric entrants, and did not fall under the said criteria. [Profit ratio of electricity business of regulated sectors for the last three fiscal years and average profit ratio of the last ten fiscal years of all ten electric entrants] [2] Criteria based on accumulated excess profit of regulated sectors or criteria based on profit and loss of liberalized sectors Hokkaido Tohoku TEPCO EP *1 As shown in the table below, it has been confirmed that the accumulated excess profits of regulated sectors of Tohoku Electric Power Co., Inc. and TEPCO EP are not more than the specified level and they have not fallen into the red for the last two consecutive fiscal years. Hokuriku Kansai Chugoku Shikoku Kyushu Okinawa Average of 10 companies for 10 years % 5.9% 4.2% 0.9% 1.1% 0.8% 1.1% 2.4% 2.8% % 5.9% 4.0% 1.7% 2.7% 4.1% 3.8% 2.8% 3.5% % 6.9% 6.9% 0.4% 7.1% 0.3% 1.3% 6.2% 2.5% Average for 3 fiscal years*2 2.1% 6.2% 5.0% 1.0% 1.1% 1.2% 2.1% 0.3% 2.91% 2.93% *1 The value of each fiscal year is the profit ratio of Tokyo Electric Power Co., Inc. (Demerged on April 1, 2016) *2 Simple arithmetic average of percentage value of each fiscal year. 23

24 [Accumulated excess profits of regulated sectors and the specified level] Accumulated excess profits of regulated sectors and the specified level (unit: million yen) Tohoku TEPCO EP Accumulated excess profits as of the end of FY2015 [1] +28, ,099 Specified level [2] +41, ,033 Is [1] larger then [2]? (Is [1]>[2]?) No No (Source: Prepared based on an interview with Tohoku Electric Power Co., Inc. and TEPCO EP at the Executive Bureau of the Commission) Profit and loss of liberalized sectors for the last 2 years Tohoku TEPCO EP FY2014 [1] +47, ,736 FY2015 [2] +80, ,041 Are they suffering deficits for 2 consecutive years? (Are [1] < 0 and [2] < 0?) No No (Source: Prepared based on an interview with Tohoku Electric Power Co., Inc. and TEPCO EP at the Executive Bureau of the Commission) As shown in the above, neither Tohoku Electric Power Co., Inc. nor TEPCO EP conflicted with the criteria for both accumulated excess profits of regulated sectors and profit and loss of liberalized sectors. B Points checked by the Specialized Meeting for Fee Examination regarding post facto assessment on Hokkaido Electric Power Co., Inc., Tohoku Electric Power Co., Inc., Kansai Electric Power Co., Inc., Shikoku Electric Power Co., Inc., Kyushu Electric Power Co., Inc. and TEPCO EP: As a result of checking by the Specialized Meeting for Fee Examination, it was confirmed that the profit and loss of electricity rates, etc. of each utility were not inappropriate. As a result of the above, in view of various factors such as fluctuations of fuel prices and exchange rates, delay of resumption of nuclear power plants and so on, there was, in general, no record of expenses that unreasonably exceeded the budgeted cost. Therefore, it has been confirmed that the electric entrants, which were subject to the post facto assessment of this time, were not required to apply for approval for a price-cut of the current approved rates. On the other hand, however, the actual amount spent for payroll, which is a part of personnel expenses, exceeded the budget in all of the companies, although it can be considered to be unavoidable in view of the necessity for 24

25 recruitment of proper human-resources under a severe business environment. While each company has its own circumstances of management, utilities are requested to strive for the management of their operation with careful consideration for the results of rate assessment not only for such cost items but for other items as well. Reduction of the repair cost of generating plants was one of the major efforts for enhancement of management efficiency. It was implemented on expenses included in the cost based on the evaluation on risk-map (i.e., prioritization in accordance with the degree of importance and emergency) so that impairment of reliability for power supply can be avoided. Investment for safety measures and essential items necessary for maintenance of supply reliability, of which necessary cost is included in electricity rates as a rational cost, should be continued appropriately. Therefore, needless to say, the determination of emergency carry-over of maintenance cost should still be done with careful risk assessment based on technical findings and cost-benefit performance of alternative measures, etc. Enhancement of efficiency should not be done as an effort simply for a temporary improvement of profit and loss, but, in addition, should be aimed for structural and permanent improvement of costs which will result in cost reduction and eventual restraint on an electricity rate increase in the future. Various efforts of electric entrants were presented during the course of assessment this time. As for the efforts by utilities network sectors which do not have a competitive relationship among the utilities directly, it is important that they share information with each other to actively incorporate useful information with necessary modifications for their own dimensions. Furthermore, because the competition among liberalized sectors will help enhancement of efficiency of overall electricity supply cost, utilities are requested to make efforts with originality and ingenuity for competition in the fully liberalized market for retail electricity. Some utilities consider the future resumption of nuclear power plants to be unforeseeable. Although the current cost estimate is made based on a certain level of operation rate of nuclear power, the latest state of profit and loss is on an upward trend thanks to efforts for improvement of management efficiency during the cost finding period. In view of the fact that the fuel cost of thermal power plants will be reduced when resumption of nuclear power plants is realized, utilities should consider allocating such reduced costs appropriately to reduce the temporary deferment of expenditures as well as to return the benefit to consumers, etc. In view of the foregoing, the assessment has concluded that utilities are required to continue striving sincerely for improvement of management efficiency and providing consumers with understandable explanations and information on appropriateness of transitional regulated tariff. 25

26 Section 8 Audit Pursuant to the provision of Article 105 of Electricity Business Act and Article 21 of Supplemental Provisions of 2nd Step Revision of Act, an audit was conducted on 12 companies of general transmission and distribution utilities, deemed electricity retailers, etc. In the course of the audit of FY2016, prohibited activities associated with wheeling service in electricity business, which was an audit item continued from the previous year, was focused on as a prioritized audit item to check if any practices that may be problematic is conducted from a viewpoint of fair and effective competition defined in Guidelines for Proper Electric Power Trade (revised on February 6, 2017, Japan Fair Trade Commission, METI). As a result of the audit conducted in FY2016, 15 items of audit findings were reported by officials that conducted the audit. The Commission examined the report and concluded that there was neither an issue which was subject to recommendation to general electric entrants, etc. based on Article of Electricity Business Act nor an issue which was subject to a recommendation to the Minister of Economy, Trade and Industry based on Article of the same act. However, the Commission gave oral administrative guidance on required matters to six utilities (on ten items) and written administrative guidance on required matters to four utilities (on five items) so that utilities voluntary improvement could be facilitated for future business operations. [Breakdown of Administrative Guidance] (unit: case) [1] Audit on operational procedure, etc. of general provisions Number of cases [2] Audit on financial statement 1 [3] Audit on sectoral profit and loss 4 [4] Audit on profit and loss of wheeling services, 1 etc. [5] Audit on prohibited activities associated with wheeling services 5 [6] Audit on other necessary items 0 Total

27 [Items to be handled by the Headquarters of the Ministry] i. Findings that can be considered minor, such as errors in writing (Non-compliance with laws and regulations but still minor) [1] Audit on operational procedure, etc. of general provisions 1 Details of finding Some cases where the discount amount was too high due to an erroneous calculation method were found in relation to the power failure discount for wheeling service rate. 2 Some cases where the discount was not applied properly to multiple occurrences of power failure were found in relation to the power failure discount for the wheeling service rate. [2] Audit on financial statement (no applicable case found) [3] Audit on sectoral profit and loss Details of finding For cost estimation of the power source cable, there was a case where the cost was overestimated because the type of cable to connect a newly built hydro power plant to a network was incorrectly specified. There was a case where the cost ratio on the book value basis (construction cost ratio), which is used for allocation of substation cost to power receiving service cost and to power distribution service cost, was erroneously calculated. Regarding extraction of miscellaneous cost in the course of extraction of distribution consumer cost from distribution cost, there was a case where a directly chargeable cost that could be identified as a consumer cost was not directly charged to consumer cost but was erroneously charged to a cost other than consumer cost. [4] Audit on profit and loss of wheeling services, etc. 1 Details of finding For cost estimation of the power source cable, there was a case where the cost was overestimated because the range of NW to connect a newly built hydro power plant to a network was incorrectly specified. Details of administrative guidance Oral guidance was given for proper calculation in accordance with the Wheeling Service provisions and the company s in-house rules. Oral guidance was given for proper calculation in accordance with the Wheeling Service provisions and the company s in-house rules. Details of administrative guidance Written guidance was given for proper calculations in accordance with ordinance for sectoral profit and loss statement, the company s in-house rules and others. Written guidance was given for proper calculations in accordance with ordinance for sectoral profit and loss statement, the company s in-house rules and others. Oral guidance was given for proper calculations in accordance with ordinance for sectoral profit and loss statement, the company s in-house rules and others. Details of administrative guidance Written guidance was given for proper calculations in accordance with ordinance for profit and loss statement for wheeling service, etc. and the company s in-house rules, etc. [5] Audit on prohibited activities associated with wheeling services (no applicable case found) [6] Audit on other necessary items (no applicable case found) 27

28 ii. Other items to be reported (Not violation of laws and regulations but matters that require improvement) [5] Audit on prohibited activities associated with wheeling services 1 2 Details of finding There was a case where reimbursement for settlement of construction contribution was delayed due to a delay in paperwork, etc. (Example) Delayed period: Approximately 8 months Delayed amount: Approximately 40 million There was a case where reimbursement for settlement of construction contribution was delayed due to poor progress management, etc. such as no construction completion notice. (Example) Delayed period: Approximately 22 months Delayed amount: Approximately 400,000 Details of administrative guidance Written guidance was given for proper processing in accordance with the company s inhouse rules, etc. Written guidance was given for proper processing in accordance with the company s inhouse rules, etc. [1] Audit on operational procedure, etc. of general provisions 2 cases (oral guidance) [2] Audit on financial statement 1 case (oral guidance) [3] Audit on sectoral profit and loss 1 case (oral guidance) [4] Audit on profit and loss of wheeling services, etc. (no applicable case found) [5] Audit on prohibited activities associated with wheeling services 3 cases (oral guidance) [6] Audit on other necessary items (no applicable case found) * For items to be handled by the Bureaus of Economy, Trade and Industry, there was no applicable case. 28

29 Chapter 2 Efforts for higher efficiency of the electricity market and promotion of competition Section 1 Environmental improvement for negative watt trade In the past, considering the demand of electricity as given conditions, efforts for improvement of the electricity system were focused on how to ensure electricity supply. However, the Great East Japan Earthquake in March 2011 and the associated accident of the nuclear power plant served as a trigger to emphasize the importance of socalled Demand Response that focuses on efforts for flexible electricity consumption to supply capability, in addition to the importance of energy conservation. As a next step to Demand Response, the Basic Energy Plan (Cabinet Approval of April 11, 2014) addressed the development of negative watt trade. Negative watt trade is a system to bundle and trade electricity conserved by multiple electricity consumers in response to a request by electricity retailers, etc. The electricity consumers will receive consideration from the retailers when the request by retailers to consumers for conservation is mediated by an aggregator (so-called negative watt trader ) which bundles the conserved electricity and trades such bundled electricity. It has been decided to stabilize the supply of electricity by development and management of an environment that facilitates introduction of a new business structure based on Demand Response, such as negative watt trade. As a part of such development of the environment, the 3rd Step Revision of Act was partially enforced on April 1, 2017 to stipulate provisions for specified wholesale supply, which allows wholesale supply of electricity created by curbing of consumers demand to retailers for the purpose of retail supply, in the Electricity Business Act. At the same time, the electricity of the specified wholesale supply has been classified as electricity that can be used for Electricity Quantity Adjustment Service (imbalance supply) performed by general transmission and distribution utilities, just like electricity generated in power plants. Such arrangements as above contributed to establish a system that helps promote negative watt trade, such as resale of electricity created by curbing of demand. Under such circumstances, the Specialized Meeting for Policy Design, which was established under the Commission, studied rules to be imposed on negative watt traders that resale electricity created by curbing of demand so that proper performance of negative watt trade could be ensured. Guidelines for Proper Electric Power Trade prepared jointly by METI and Japan Fair Trade Commission was also revised to include necessary revisions to ensure the proper performance of negative watt trade. With regard to the portion of the said guidelines, of which METI is in charge, the Commission submitted a proposal to the Minister of Economy, Trade and Industry based on the discussion in the Specialized Meeting for Policy Design, and the guidelines have been revised jointly by METI and Japan Fair Trade Commission on February 6,

30 Section 2 Regarding open procurement system for procurement of balancing power The 2nd Step Revision of Act that stipulates provisions on full liberalization of the electricity retail market and adoption of a new licensing system was enforced on April 1, 2016, and ancillary services, such as maintenance of frequency throughout the network, to ensure high quality electricity supply, which have been taken care of by the general electric utilities using their own power generation facilities, have been delegated to general transmission and distribution utilities. As a result, a system has been set up so that general transmission and distribution utilities can procure the power source, etc. required for the performance of ancillary services from electricity generation utilities as balancing power, and that the cost required to secure such balancing power can be recovered by wheeling service charges. This system is expected to contribute to promotion of competition among electricity generation utilities, etc. and volume increase/quality improvement of available balancing power by participation of various types of electricity generation utilities, as well as more efficient utilization of balancing power by general transmission and distribution utilities. This system works on the premise that the fairness and transparency in the procurement of balancing power by general transmission and distribution utilities is duly secured. Therefore, it was necessary that the procurement of balancing power by general transmission and distribution utilities, which would start from FY2016, should, in principle, be implemented in a fair and transparent manner such as an open procurement system. The concrete details of such system were, however, left to the discretion of each general electricity transmission and distribution utility. Because of the above, the Specialized Meeting for Policy Design, which was established under the Commission, compiled Concept of Open Procurement of balancing power for General Transmission and Distribution Utility to describe the concept to secure fairness and transparency of the open procurement system and implementation methods of a desirous open procurement system so that the basic idea for appropriate procurement of balancing power by general transmission and distribution utilities can be presented beforehand and that the procurement of balancing power can be conducted smoothly in a fair and transparent manner through an open procurement system. The Commission submitted the Concept to the Minister of Economy, Trade and Industry as a proposal on September 26, Thereafter, based on the proposal, the Minister of Economy, Trade and Industry established Concept of Open Procurement of balancing power for General Transmission and Distribution Utility (hereinafter referred to as Guidelines on Open Procurement System ), and general transmission and distribution utilities conducted the procurement of balancing power for FY2017 through open procurement in accordance with the said concept. <Major contents of Guidelines on Open Procurement System > Description on items to be explained by general transmission and distribution utility, main points of terms and conditions of contract such as contract term and settlement of expenses, and concept for bid evaluation, etc. in relation to open procurement Concept for collection of opinions on open procurement and disclosure of contract price after procurement Method of surveillance to be conducted after open procurement 30

31 1. Outline of open procurement and results Based on the Guidelines on Open Procurement, each general transmission and distribution utility began receiving applications from late October 2016 as needed. Outlines of major requirements set by each general transmission and distribution utility for balancing power for each segment are as follows: Response to online instruction Frequency adjustment function [Major requirements for balancing power for each segment] Power source I a Power source I b Power source I Power source II Required Required Required, in principle* 1 Required Required Not required Not required Required Response time Within 5 minutes Within 15 minutes to within 30 minutes Within 3 hours *5 Duration* 2 7 hours to 11 hours 7 hours to 16 hours 2 hours to 4 hours Minimum capacity* 3 Period of provision* 4 5 MW to 15 MW 5 MW to 29 MW 1 MW or more *5 Throughout the year (April 1, 2017 March 31, 2018) Same as on the left Throughout the year In summer (July to September) Throughout the year (only excess power after gate is closed) *1: As for the off-line power source, etc., each utility will receive application as much as practically possible (5 to 10 cases). *2: A bid that does not fulfill the required duration may be received. It will be reflected in the price evaluation. *3: In case of DR, evaluation will be made based on the capacity not by each consumer but by each aggregator. *4: The yearly number of days during which operation can be stopped for each utility will be set. The number of times of exercise will be set for Power source I. *5: There is no concept of Contracted Capacity for Power source II. However, output flexibility such as an ability to meet variation of 10 MW within 5 minutes will be one of the requirements. Source: Prepared by the Electricity and Gas Market Surveillance Commission based on information published by general transmission and distribution utilities As a result of open procurement by general transmission and distribution utilities, the number of bids submitted by bidders other than the general electric utilities for the above power source segment of I a, I b and II was small. But for Power source I, approximately 30% of the tendered electricity was bidden by those other than the general electric utilities. The bidden electricity utilizing Demand Response was 1112 MW, out of which 958 MW ( 3,593 million in total) was awarded, while the total for Power source I was 1327 MW. This was the first example of the trade of Demand Response in Japan in a competitive open bid. 31

32 [Results of open procurement] Results of procurement of adjustment force through open procurement (Power source I) Capacity: 10MW Price: Yen/kW Hokkaido Tohoku Tokyo Chubu Hokuriku Tendered capacity Power source I a Bidden capacity Awarded capacity Highest price 37,862 yen 40,911 yen 15,171 yen 11,696 yen 21,461 yen Average price 25,647 yen 11,531 yen 14,575 yen 9,260 yen 15,359 yen Tendered capacity Power source I b Bidden capacity Awarded capacity Highest price No bid submitted No bid submitted 15,171 yen 5,165 yen 18,317 yen Average price 15,171 yen 5,165 yen 18,317 yen Tendered capacity Power source I Bidden capacity Awarded capacity Highest price No bid submitted 782 yen 4,750 yen 1,245 yen No bid submitted Average price 782 yen 4,501 yen 1,196 yen Results of procurement of adjustment force through open procurement (Power source I) Capacity: 10MW Price: Yen/kW Tendered capacity Kansai Chugoku Shikoku Kyushu Okinawa Total Power source I a Bidden capacity Awarded capacity Highest price 112,339 yen 10,119 yen 17,579 yen 42,261 yen 37,336 yen Average price 9,740 yen 9,785 yen 12,328 yen 16,291 yen 27,878 yen Tendered capacity Power source I b Bidden capacity Awarded capacity Highest price 12,331 yen No bid submitted 17,579 yen No bid submitted 9,352 yen Average price 12,319 yen 17,579 yen 7,676 yen Tendered capacity Power source I Bidden capacity Awarded capacity Highest price Average price 5,900 yen 3,034 yen No bid submitted No bid submitted 32,622 yen 8,176 yen No bid submitted Source: Prepared by the Electricity and Gas Market Surveillance Commission based on information published by each general transmission and distribution utility *Figures in parentheses are offered and awarded volume of bids by utilities other than the general electric utilities and are the number included in the total number. 32

33 Results of procurement of adjustment force through open procurement (details of Power source I ) Number of cases: case Capacity: 10MW Price: Yen/kW Tohoku Tokyo Chubu Kansai Kyushu Number of cases Capacity Number of cases Capacity Number of cases Capacity Number of cases Capacity Number of cases Capacity Number of cases Total Capacity Breakdown of bid and award (re-publication) Number of cases Capacity Tendered volume Bidden volume total Awarded volume total Power source Power source Highest price Average price Average price (DR) Period of provision 782 yen 782 yen July 16 to September yen 782 yen 782 yen April 1 to March yen 782 yen 782 yen July 1 to September yen 782 yen 782 yen April 1 to March yen 782 yen 782 yen April 1 to March 31 * Figures in parentheses are bidden and awarded volume and number of bids of utilities other than the general electric utilities and are the number included in the total number. Source: Prepared by the Electricity and Gas Market Surveillance Commission based on interviews with general transmission and distribution utilities Results of application for Power source II Number of cases: case Capacity: 10MW Hokkaido Tohoku Tokyo Chubu Hokuriku Number of cases Capacity Number of cases Capacity Number of cases Capacity Number of cases Capacity Number of cases Capacity The general electric utility Utility other than the general electric utility Total Kansai Chugoku Shikoku Kyushu Okinawa Total Number of cases Capacity Number of cases Capacity Number of cases Capacity Number of cases Capacity Number of cases Capacity Number of cases Capacity The general electric utility Utility other than the general electric utility Total Source: Prepared by the Electricity and Gas Market Surveillance Commission based on interviews with general transmission and distribution utilities 33

34 2. Surveillance (Monitoring) of Operation Status and Release of Information to the Public The Guidelines on Open Procurement stipulates that appropriateness of required volume of balancing power, appropriateness of volume (kwh) price of electricity and status of merit order are to be checked. Therefore, for the open procurement conducted in FY2016, the Commission checked the concept of utilities, which participated in tenders, regarding the method to figure out the price per kwh in the actual operation stage, as well as the following, and released the results to the public: How and on what basis the utilities selected power sources to participate in the tender, How the utilities estimated the price per kw for the tender. The Guideline on Open Procurement also has stipulations on publication of information. The Commission, therefore, has been publishing information on the operation of balancing power after April 2017 on its website. 34

35 [Published information on operation of balancing power] Price per volume (kwh) of electricity for balancing power ordered by general transmission and distribution utilities (unit: yen/kwh) April 1 to April 7 April 8 to April 14 April 15 to April 21 April 22 to April 28 April 29 to May 5 May 6 to May 12 May 13 to May 19 May 20 to May 26 May 27 to June 2 June 3 to June 9 June 10 to June 16 June 17 to June 23 June 24 to June 30 Highest price for each week The highest among 10 utilities The lowest among 10 utilities Price to order capacity increase Simple arithmetic average of 10 utilities Weighted average price for each week The The Weighted highest lowest average of among 10 among utilities utilities utilities The lowest price for each week The lowest among 10 utilities The highest among 10 utilities Price to order capacity decrease Simple arithmetic average of 10 utilities Weighted average price for each week The The Weighted lowest highest average of among 10 among utilities utilities utilities Weighted average of absolute value of increase/dec rease of 10 utilities * Pumped storage power plant of which both increase and decrease are ordered by general transmission and distribution utility as balancing power is not included in this statistic. Volume of electricity for balancing power ordered by general transmission and distribution utilities April 1 to April 7 April 8 to April 14 April 15 to April 21 April 22 to April 28 April 29 to May 5 May 6 to May 12 May 13 to May 19 May 20 to May 26 May 27 to June 2 June 3 to June 9 June 10 to June 16 June 17 to June 23 June 24 to June 30 Hokkaido Tohoku Electric Electric Power TEPCO PG Power Co., Inc. Co., Inc. Ordered Ordered Ordered Ordered Ordered Ordered volume of volume of volume of volume of volume of volume of increase decrease increase decrease increase decrease Chubu Electric Power Co., Inc. Ordered volume of increase Ordered volume of decrease Hokuriku Electric Power Company Ordered volume of increase Ordered volume of decrease Kansai Electric Power Co., Inc. Ordered volume of increase Ordered volume of decrease Chugoku Electric Power Co., Inc. Ordered volume of increase Ordered volume of decrease Shikoku Electric Kyushu Electric Power Co., Inc. Power Co., Inc. Ordered volume of increase Ordered volume of decrease Ordered volume of increase Ordered volume of decrease (unit: GWh) Okinawa Electric Power Co., Inc * Pumped storage power plant of which both increase and decrease are ordered by general transmission and distribution utility as balancing power is not included in this statistic. Ordered volume of increase Ordered volume of decrease 35

36 3. Study on improvement towards open procurement in FY2018 The Commission conducted questionnaires on the necessity of further improvement towards the open procurement in FY2018 for power generation utilities and negative watt traders, and has been requesting general transmission and distribution utilities for improvement of open procurement based on the results of such questionnaires. As a result, the Commission received a proposal from general electric entrants in the Specialized Meeting for Policy Design in June 2017 for improvement including the addition of the new segments of power supply. Most of the said proposal was accepted, but some of the improvement requests were returned to the utilities for further study. [Improvement plan for open procurement proposed by general transmission and distribution utility] The 19th Specialized Meeting for Policy Design (June 27, 2017), Material No. 3-1, Extract of material submitted to the Federation of Electric Power Companies of Japan As an immediate effort, an increase of utilization of Power source II and DR which are stand-by capacity for retail electricity is practical. Details of request There may be room for improvement such as subdivision of segment of Power source II, which may allow the registration of power sources without functions of online control or frequency adjustment function, etc. There may be room for improvement concerning the fact that the communication standards which have secured necessary and sufficient security are deemed as on-line. Regarding the study towards standardization of outline of procurement of balancing power It may be effective if arrangements such as a longer application period, announcement well before open procurement, and setting up of a contact desk to receive questions on requirements, etc. are made so that participants will have enough time for preparation. Broad-based operation of balancing power indicated a possibility for higher efficiency in total. Regarding broadbased operation of balancing power, we will request general transmission and distribution utilities to evaluate the benefit and to study the method (what they can do in the short term and med-and-long term). Direction of response 2 segments will be added to Power source II (II a) Power source II b: Seek for a bid for power source on-line on exclusive channel (operation of merit order) only with supply demand balance function Power source II: Seek for a bid for power source and DR (by utilization of simplified load dispatching system) even though it will not be like the merit order operation by load control system of a central load dispatching center. Structuring of simplified load dispatching system Power source I: In principle, it shall be unified to an on-line exclusive channel or simplified load dispatching system. However, an off-line power source will also be sought for limited cases as transitional measures. Power source I b, II b: To be verified during the VPP Verification Project this fiscal year Standardization of facility requirements Standardization is being coordinated on speed and width of variation, minimum capacity and so on. Regarding the procedure to decide consumers at the time of bidding From the viewpoint of stable supply by steady procurement of balancing power, consumers shall be decided continuously at the time of bidding. Creative alteration of period to raise awareness Necessary preparation will be made by the general transmission and distribution utilities so that it can be scheduled in the period from August to the end of February. At least one month shall be secured as a period of open procurement in accordance with the guidelines. Publication of information on a constantly available contact desk for participants, which was opened last year, and preliminary notification before announcement of open procurement will be conducted in July before RFC(Request for Comments). To study a method to lower the cost of supply-demand adjustment in an accelerated manner during the period before the supply-demand adjustment market is established. For example, economical switching operation (30 minutes box type), which is conducted between general transmission and distribution utilities, was studied. Response period Open procurement to be conducted this fiscal year Open procurement to be conducted this fiscal year Open procurement to be conducted in or after the next fiscal year Open procurement to be conducted this fiscal year Open procurement to be conducted this fiscal year As soon as the study and preparation are completed 36

37 Section 3 Regarding imbalance analysis In March 2017 at the Working Group for Policy Study of Subcommittee for Basic Policy for Electricity and Gas of the Agency for Natural Resources and Energy, the discussion on the review of the imbalance charge system was started and issues such as the verification of predictability which is the premise of the current system and incentives for achievement of same time and same volume by utilities were raised. Issues (Review of imbalance charge system) Issues Verification of predictability which is the premise of the current system Incentives for achievement of same time and same volume by utilities Measures for arbitrage trade by intentional actions to create imbalance Study of the charging system taking into consideration establishment of a real-time market [Issues raised in the Working Group for Policy Study] Outline In relation to facilitation of achievement of same time and same volume, the current imbalance charge system is designed aiming for a system without forecasting capability of utilities. However, it may have resulted in a system in which utilities still are able to have a certain level of forecasting capability because of the existence of static difference in values between districts (β value). Because of the limited range of unit price variation (α value) based on supply-demand conditions, it may have resulted in the incentives for achievement of same time and same volume by utilities not working effectively under the current imbalance charge system. It may be necessary to review, as required, if utilities properly forecast the supply and demand to verify that their efforts to match the supply and demand are made in a manner with economic rationality. Under the current imbalance charge system, a utility which has intentionally caused imbalance can be subject to a business improvement order by the government. On the other hand, however, it may be appropriate to reconsider the rule if there are substantial numbers of such causes that provoke those kinds of inappropriate activities. After the establishment of a real-time market, it will be able to be considered that the settlement of imbalance charges is done based on market prices of the real-time market. For the review of the current imbalance charge system under such circumstances, it may be important to study a system that will be required in the future so that the concept of a charging system as a whole can maintain consistency. * If there is any problem with the current system, however, tentative measures will need to be taken promptly. 37

38 Unit prices of imbalance after full liberalization of the electricity retail market in April 2016 are specified to be calculated based on market prices with correction by two adjustment factors (α and β). In this way, analysis on unit prices of imbalance in FY2016 was conducted in the Specialized Meeting for Policy Design in May 2017 based on the issues raised in the Working Group for Policy Study. [1] Results of analysis of α As a tendency in total, it was confirmed that the value of α varied as expected. Namely, α was larger than 1 if the country-wide imbalance was insufficient, and was less than 1 if the same was excessive. However, there were multiple unexpected cases, namely, α smaller than 1 with insufficient country-wide imbalance and α more than 1 with excessive country-wide imbalance. The main cause of such phenomena was considered to be the max. /min. limit value of α. [2] Results of analysis of β As a result of checking the relationship between a unit price of imbalance in an area and the area price, the relationship between the unit price of imbalance and the area price was substantially different and was confirmed to be in a situation that could be forecasted to a certain extent. The main causes of such phenomena were correction by β and price differences in market splitting. The Specialized Meeting for Policy Design made a recommendation for a revised plan based on the result of such analyses to change the setting of the max./min. limit value of α (increase of max. limit value and decrease of min. limit value) and to unify the value of β to 0 for all areas (it shall be noted that, for some areas, this will not always decrease forecasting capability to a satisfactory level). In this relation, taking such a recommendation also into consideration, the Agency of Natural Resources and Energy changed the max./min. limit value of α from 20% to 3% and revised the imbalance charge to make the balance between an area price and a system price be the new β. 38

39 Section 4 Regarding activity regulation in association with legal separation The 3rd Step Revision of Act, which prohibits general transmission and distribution utilities, etc. from performing retail electricity business or electricity generation business as an additional operation (Legal Separation), and which imposes activity regulations on general electric entrants regarding their operation of human relations and accounting, etc., will be enforced on April 1, 2020 for electricity and in April 2022 for gas so that neutrality of transmission and distribution business is further enhanced. In relation to this, the Specialized Meeting for Policy Design has been studying the following issues regarding activity regulations since March 2017, so that the regulations will enhance the neutrality of general transmission and distribution utilities. (Main issues of activity regulations) (1) Rules on concurrent posts (director, etc.) Allowable range of duties of directors, etc. as an exception, and others (2) Rules on concurrent posts (persons engaged, etc.) Range of persons engaged in important roles who are prohibited from concurrent posts Range of persons who will be allowed to have concurrent posts as an exception, and others (3) Rules on undertaking and outsourcing of work Details of work that is allowed to be undertaken and outsourced by general transmission and distribution utilities, etc. as an exception, and others (4) Rules on transfer of profit between groups (ordinary trade conditions) Concrete judgement criteria regarding trade conditions which are different from ordinary conditions and have risks for interference to appropriate competitive relationship Range of persons who have a special relationship with general transmission and distribution utilities which are subject to the regulations, and others (5) Rules on separation of name of company, trade mark, advertisement, building, system and others Judgement criteria regarding names of company of which a visible outline allows identification that the company is in charge of general electricity transmission and distribution Obligation to establish own trade mark and necessity for certain transitional measures Judgement criteria regarding prohibition on business performance and advertisement jointly conducted by general transmission and distribution utilities and group companies Establishment of framework for appropriate management of information, and others (6) Others Rules on design of organizations Others 39

40 Section 5 Regarding sharing style of maintenance and operation cost of power transmission and distribution aimed for efficiency improvement Regarding the sharing style of maintenance and operation cost of power transmission and distribution aimed for efficiency improvement, the Specialized Meeting for Policy Design has been working on the study along with conducting interviews with related utilities, etc. since autumn of 2015 taking into consideration the changes of the environment around the electricity market such as the progress of reform of electricity systems, from the following viewpoints: [1] Curb and reduction of maintenance and operation cost of transmission and distribution network [2] To secure fairness [3] Promotion of innovation In the 9th Specialized Meeting for Policy Design in July 2016, the points of the issues were summarized based on the discussions and studies that had taken place up to then. The points were generally divided into the following three categories: How sharing by electricity generation utilities should be carried out, How sharing by electricity retailers should be carried out, Enhancement of efficiency of network utilization Because these points are deeply related each other, it has been decided that these should be studied further in an integrated manner taking into consideration the opinions of parties concerned. To deepen the study of the above issues, the Working Group for the Cost sharing system for Power Transmission and Distribution (Group leader: Dr. Akihiko Yokoyama, Professor, the University of Tokyo, Graduate School of Frontier Sciences) was established in September 2016 under the Specialized Meeting for Policy Design. This working group further studied such issues along with interviews with utilities. In the 6th Working Group for the Cost sharing system for Power Transmission and Distribution in June 2017, Points of issues to be studied were publicly presented. It was a summary of points of discussions in the working group up to then and indicated future tasks to be studied. 40

41 Section 6 Regarding activation of wholesale electricity trade In order to materialize a stable and low-cost supply of electricity through competition among electricity retailers, which is the goal of the electricity system reform, the activation of the wholesale electricity market is indispensable so electricity retailers can procure enough volume of electricity from the market as required for their supply of retail electricity. For such a purpose, the Specialized Meeting for Policy Design has been discussing the efforts towards the activation of the wholesale electricity market. To put it concretely, the Specialized Meeting for Policy Design has been doing [1] improvement of voluntary efforts by the general electric utilities; [2] study on measures to activate wholesale electricity market such as gross bidding; [3] verification of intra-company and inter-company trade price for constant back-up and trade on negotiation basis; and [4] analysis on impacts of nuclear power plant resumption and solar power generation on the wholesale electricity market. As for [1] improvement of voluntary efforts by the general electric utilities, they already made an arrangement for the entirety of the excess electricity (other than the required stand-by electricity) to be supplied at prices on the marginal cost basis as described in Report of Special Committee for Electricity System Reform (February 2013). Under such circumstances, through interviews with the general electric utilities, the Specialized Meeting suggested improvement, such as review of the estimation method of volume of electricity so that they can bid and review the setting process of bidding prices. Thus the improvement of their voluntary efforts was further enhanced and the improvement of liquidity of the wholesale electricity market was achieved. In addition, in view of the fact that the general electric utilities currently have a contract on a negotiation basis for the electricity from power sources owned by Electric Power Development Co., Ltd (hereinafter referred to as J-Power ), the Specialized Meeting succeeded in reviewing the contract by the general electric utilities and J-Power through analysis of the contract details and through interviews, etc. As for the next item [2] measures to activate wholesale electricity market such as gross bidding, taking into consideration activation measures for the wholesale market in other countries, measures were taken to introduce gross bidding, which is trade via JEPX on the premise of repurchase of necessary volume, for all or a part of inhouse trade of the general electric utility. The measures were aimed for improvement of liquidity of the wholesale electricity market, nature of price indexes, transparency of in-house trade, and so on. As a result of the fact that the Commission resolved issues such as a business tax imposed on the self-contracted portion of gross bidding, nine of the general electric utilities expressed their intention to conduct gross bidding as their voluntary efforts in the 13th Specialized Meeting for Policy Design (on November 13, 2016). It was confirmed that all nine utilities, which expressed such intention, had conducted gross bidding as of the end of July From now on, issues such as the evaluation method of gross bidding, impacts of such measures on the wholesale electricity market and so on are scheduled to be studied in the Specialized Meeting for Policy Design. As for [3] verification of intra-company and inter-company trade price for constant back-up and trade on negotiation basis, verification was done for the cost of in-house trade of the general electric utilities, constant backup prices, power source procurement cost of new electric entrants and so on. The purpose of such verification was to investigate based on data if the general electric utilities, which own a majority of the sources for electricity generation, were conducting the trade with new electric entrants on conditions equivalent to those for their in-house trade. In addition, data-based analysis and verification on the competitive environment, such as analyses on the 41

42 result of tenders of the general electric utilities and new electric entrants with regard to public tenders, have been conducted so that competitive disparity between the general electric utilities and new electric entrants could be analyzed. Finally, as for [4] analysis on impacts of nuclear power plant resumption and solar power generation on the wholesale electricity market, quantitative analyses have been conducted since April 2017 to examine how the electricity from such sources would influence the liquidity improvement and prices of the wholesale electricity market, taking into consideration the changes of the market environment such as the supply of FIT (Feed In Tariff) electricity to JEPX, resumption of nuclear power plants, and so on. In addition to the above, studies and review were conducted on the proposal for improvement of the publication system of information on power generation established in JEPX, measures for activation of a wholesale electricity market in the Okinawa region, etc. through interviews with the general electric utilities and new electric entrants. 42

43 Section 7 Regarding report on voluntary efforts and monitoring In the Commission, quarterly monitoring of the electricity market is conducted for fixed point analyses and verifications of voluntary efforts by the general electric utilities and competitive conditions in the electricity market. By the time of the 19th Specialized Meeting for Policy Design, the monitoring report has been prepared and published ten times in total including the report presented in the Working Group for Policy Design. The monitoring of electricity market will be conducted continuously in the future as well. [Major indexes in the report for January to March 2017] Tender Comparison of selling bid volume with the same period of the previous year Comparison of buying bid volume with the same period of the previous year Details of report of this time From January to March 2017 The same period of the previous year (January to March 2016) For reference FY2016 (April 2016 to March 2017) FY2015 (April 2015 to March 2016) 1.2 times 1.1 times 1.1 times 1.1 times 1.7 times 1.2 times 1.6 times 1.2 times Wholesale electricity exchange Spot market Hour-ahead market *1 Contract Contracted volume 7 billion kwh 4.2 billion kwh 23 billion kwh 15.4 billion kwh Comparison of contracted volume with the same period of the previous year Average contract price (system price) Occurrence rate of market splitting between the east and west market Contract 1.7 times 1.5 times 1.5 times 1.2 times 10.21/kWh 7.98/kWh 8.46/kWh 9.78/kWh 40.1% 87.5% 56.8% 67.9% Contracted volume 0.68 billion kwh 1.66 billion kwh Average contract price 10.09/kWh 8.76/kWh Share in electricity sold 3.4% 2.0% 2.9% 2.0% Retail electricity market (for reference) *2 Electricity sold billion kwh billion kwh billion kwh billion kwh New electricity utility 20.1 billion kwh 12.4 billion kwh 66.2 billion kwh 43.6 billion kwh *1 Since April 2016, the market for the hour-ahead market has been changed to a market dealing 1-hour-ahead market (continuous trading session system) from a 4-hours-ahead market (single price auction system). Because of such a difference, the value of the same period of the previous year is not mentioned in the table. The contracted volume and contracted price in the 4-hours-ahead market were, respectively, 0.27 billion kwh and 7.39/kWh for January to March 2016 and 1.31 billion kwh and 9.55/kWh for FY2015. *2 Source: Survey of the Electric Power Statistics and Electricity Trading Report [Implementation status of monitoring report] The 1st Working Group for Policy Design (August 2, 2013) The 6th Working Group for Policy Design (June 23, 2014) The 13th Working Group for Policy Design (June 25, 2015) The 4th Specialized Meeting for Policy Design (January 22, 2016) The 8th Specialized Meeting for Policy Design (June 17, 2016) The 11th Specialized Meeting for Policy Design (September 27, 2016) The 14th Specialized Meeting for Policy Design (December 19, 2016) The 16th Specialized Meeting for Policy Design (March 31, 2017) The 19th Specialized Meeting for Policy Design (June 27, 2017) The 22nd Specialized Meeting for Policy Design (September 29, 2017) 43

44 Section 8 Revision of Guidelines on Electricity Retail Business Based on an assumption that various utilities would enter into the market taking advantage of full liberalization of the electricity retail market in April 2016, guidelines for the related utilities compliance with the Electricity Business Act, etc. were established. New guideline ( Guideline of Electricity Retail Business ) were established in January 2016 for the protection of electricity consumers. In July of the same year, the Commission submitted a proposal for revision of the guidelines and the Minister of Economy, Trade and Industry revised the guidelines in response to the proposal. One of such revision was an addition of Desirable Practice that electricity retailers comprehensible announcement on their website, etc. about their business collaboration partners such as mediators, agents and brokers was additionally classified as Desirable Practices. In anticipation of the start of the trading in the Non-fossil Value Trading Market, where value of electricity itself and environmental value (non-fossil value) will be separated and environmental value alone will be traded, a revision was made,in June 2017, to clearly mention that such appeals as mentioned below will not be considered as problematic as far as such appeals are accompanied by a clear description of actual power source composition, etc. so that such appeals will not mislead consumers to overlook the difference between the actual composition and the composition based on which the electricity is retailed. The examples of such appeals are as follows: [1] An appeal by an electricity retailer that purchased a Non-fossil Certificate for renewable energy stating that they virtually achieved % of procured electricity generated from renewable energy by means of the purchase of a Non-fossil Certificate for renewable energy, and/or [2] An appeal by an electricity retailer that purchased a Non-fossil Certificate for renewable energy stating that they virtually achieved % of procured electricity generated from power source that emits no carbon dioxide (so-called zero-co2-emission power source ) by means of the purchase of a Non-fossil Certificate for renewable energy. [Method for disclosure of power source composition (example of a statement) Power source composition of our company (actual record of generated and procured volume of electricity (kwh) from April 1, 2015 to March 31, 2016) Hydro (30MW or larger) Coal-fired thermal LNG-fired thermal Oil-fired thermal Nuclear FIT electricity (wind power) [*1] FIT electricity (Solar energy) [*1] Solar energy Wholesale electricity exchange [*2] Others Characteristics of FIT electricity shall be mentioned (*1) A part of the purchase cost, with which we purchased this electricity, is covered by the surcharge paid by all electricity consumers including those other than our customers, and, as for the volume of CO2 emission, this electricity is regarded as electricity with CO2 emission equivalent to an average of all electricity throughout the country including thermal power plants, etc. (*2) This electricity includes electricity generated by hydro, thermal and nuclear power plants, FIT electricity, electricity from renewable energy, and so on. Characteristics of electricity procured at JEPX shall be mentioned. (*3) Types of electricity procured from other utilities are sorted out in the following manner: [1] Electricity supplied from unspecified power plants of Electric Power Company, Inc. as wholesale electricity (constant back-up) is sorted out based on the power source composition of the said utility of FY2014 (the figures will be updated as soon as the power source composition of FY2015 is announced). [2] Any part of the electricity that is procured from other utilities by an unknown power generation plant is classified into others. Concept for sorting of power source composition for electricity procured from other utilities shall be mentioned. (*4) CO2 emission factor of us (emission factor after adjustment) for FY is (Unit: kg-co2/kwh). We virtually achieved % of procured electricity generated from renewable energy by means of the purchase of the Non-fossil Certificate of designated renewable energy. CO2 emission factor (emission factor after adjustment) shall be mentioned together with power source composition. In addition, a certain appeal based on the Non-fossil Certificate may be mentioned. 44

45 Chapter 3 Section 1 Efforts, etc. toward full liberalization of the gas retail market Qualification screening for registration of gas retailer As a procedure for the registration of gas retailers, the Agency for Natural Resources and Energy evaluates the performance from the viewpoint of potentiality to secure supply capacity necessary to meet the maximum demand and the Commission examines if the retailer falls under the category of person who is found to be unsuitable for the protection of the interests of gas users. [Flow chart of procedure for registration and viewpoints for registration examination] <Flow chart of procedure for registration> [1] To submit an application for registration to the Minister of Economy, Trade and Industry [2] Examination by the Minister of Economy, Trade and Industry [2] Examination by the Electricity and Gas Market Surveillance Commission Viewpoints of examination [1] Does the applicant have potentiality to secure supply capacity necessary to meet the maximum demand and to perform gas retail business appropriately and securely? [2] Is a framework likely to be established to handle complaints and questions from the recipient of the gas retail service? [3] Registration and notification by the Minister of Economy, Trade and Industry * Standard processing period is one month Prior to full liberalization of the gas retail market, acceptance of an application for gas retailer registration started in August 2016, and the examination of applications has been conducted in sequence. 49 applications for gas retailer registration were received and 49 applicants have been registered as a result of examination by August 31, Section 2 Designation of utilities on which transitional regulated tariff is imposed In association with full liberalization of the gas retail market in April 2017, regulated tariff of retail gas will be, in principal, abolished. However, if the competitive conditions with LP gas, all electrification and the like are still considered insufficient, regulated tariff is scheduled to be applied as transitional measures to protect consumers interests. Among gas utilities, 12 general gas utilities have been designated as utilities on which the transitional regulated tariff is imposed, based on the designation criteria decided by the Gas Systems Reform Subcommittee established under the Strategic Policy Committee of Advisory Committee for Natural Resources and Energy. As for community gas utilities, 1,730 housing complexes have been designated out of 7,432 complexes throughout the country. 45

46 Section 3 Examination of the Wheeling Service provisions Towards full liberalization of the gas retail market, at the end of July 2016, 127 general gas utilities including three leading gas utilities, namely Tokyo Gas Co., Ltd., Toho Gas Co., Ltd and Osaka Gas Co., Ltd., applied for approval for the Wheeling Service provisions which contain new transportation service rates including those for small volume. (Among 203 general gas utilities, 127 utilities shall establish the Wheeling Service provisions. Such 127 utilities have a certain level of company size and have a pipeline connection to pipelines of the others.) Based on this, the Minister of Economy, Trade and Industry (and Director-General of each Bureau of Economy, Trade and Industry who handles applications from the region that the Bureau is in charge of) requested the Commission for comments on August 1 of the year. In response to such a request for opinion by the Minister of Economy, Trade and Industry, the Commission decided to proceed with the examination of the Wheeling Service provisions based on the following policies: For the approval for the Wheeling Service provisions of three leading utilities (Tokyo Gas Co., Ltd., Toho Gas co., Ltd. and Osaka Gas Co., Ltd.), the Specialized Meeting for Fee Examination (Chairman (at that time): Mr. Junji Annen, Professor, Law School of Chuo University) established under the Commission was assigned to evaluate applications from neutral, objective and professional points of view. As for seven 2nd tier companies, namely, Hokkaido Gas Co., Ltd., Sendai City Gas Bureau, Keiyo Gas Co., Ltd., Hokuriku Gas Co., Ltd., Shizuoka Gas Co., Ltd., Hiroshima Gas Co., Ltd. and Saibugas Co., Ltd., either the Executive Bureau of the Commission or each Bureau of Economy, Trade and Industry was assigned to evaluate applications by taking into consideration comments on each individual case from the Specialized Meeting for Fee Examination and by reflecting the examination status in the Specialized Meeting for Fee Examination. [Approval process for transportation service rates] As for transportation service rate of gas, gas utilities applied for an approval in accordance with Article 18, Paragraph ガスの託送料金については 電気事業法等の一部を改正する等の法律 1 of Supplementary Provision of the Act on the Partial Revision of the Electricity ( 平成 Business 27 年 Act, etc. 法律第 which 47 came 号 into ) effect 附則第 in (Act 条第 No. 147of 項に基づき ガス会社が認可申請を提出 経済 2015). The Minister of Economy, Trade and Industry made a 産業大臣は 電力 ガス取引監視等委員会の意見を聴いた上で 認可を行った decision on approval taking into consideration comments from the Electricity and Gas Market Surveillance Commission. ((from 平成 29 April 年 月 onward) ~) Gas ガス company 会社 Application 申請 (7 The 月末 end ) of July Publication of provisions Become 約款の公表適用 operative The Minister of Economy, 経済産業大臣 Trade and Industry 受 Receipt 理 Consultation 意見聴取 (8 August 月 11 日 ) Approval 認可 (12 (December 月 2626) 日 ) Electricity and Gas 電力 ガス取引 Market Surveillance 監視等委員会 Commission Examination 審査 Comments 意見 (August (8 月 to ~12 December) 月 ) * Assessment by the Specialized Meeting 料金審査専門会合にて審査 for Rate Assessment (12 (December 月 7 日 ) 7) 46

47 For 117 other general gas utilities, the Executive Bureau of the Commission or each Bureau of Economy, Trade and Industry was assigned to evaluate applications by reflecting the examination status in the Specialized Meeting for Fee Examination. The Specialized Meeting for Fee Examination was held eight times in total during the 5-month period from August of the same year and compiled the Draft of Examination Policy on December 1 of the same year after strict examination of the details of the application from three leading utilities, Tokyo Gas Co., Ltd, Toho Gas Co., Ltd. and Osaka Gas Co., Ltd. On December 7 of the same year, the Commission examined the Draft of the Examination Policy and formulated the Examination Policy for utilities under the control of the Headquarters of the Ministry as per Main Points of Examination Policy on Application for Approval for the Wheeling Service provisions of the next page, and submitted the same to the Minister of Economy, Trade and Industry as the Commission s comments on the same day. Based on the comments therein, the Minister of Economy, Trade and Industry instructed utilities to submit an amendment of application and approved the Wheeling Service provisions on December 26 of the same year. Also for utilities under the control of Bureaus of Economy, Trade and Industry, the Commission submitted its comments (examination policy) to the Director-General of each Bureau of the Minister of Economy, Trade and Industry by December 9 of the same year. Based on the comments, the Director-General of each Bureau of Economy, Trade and Industry instructed utilities to submit an amendment of application and approved the Wheeling Service provisions by December 28 of the same year. Thereafter, utilities promptly published their new Wheeling Service provisions that were approved as above and made necessary preparations towards the operation of the new system, then the Wheeling Service provisions were put into force from April 1,

48 [Main points of examination results of application for approval for the Wheeling Service provisions] Regarding the assessment of application for approval for transportation service provisions Specialized Meeting for Rates Assessment of the Electricity and Gas Market Surveillance Commission assesses an application for approval from a gas utility from neutral, objective and professional viewpoints if it is structured for the maximization of management efficiency in the context of applicable laws and regulations and assessment standards. The Electricity and Gas Market Surveillance Commission reviewed the Draft of Assessment Policy compiled by the Specialized Meeting for Rates Assessment and formulated the Assessment Policy on December 7 in the 61st Electricity and Gas Market Surveillance Commission. Cost of transportation service rate proposed by utilities (3 years average) (unit: 100 million yen) Tokyo Gas Co., Ltd. Tokyo Gas Co., Ltd. Tokyo Gas Co., Ltd. (Tokyo district, etc.) (Gunma district and others) (Yotsukaido 12A district) Toho Gas Co., Ltd. Osaka Gas Co., Ltd Tobu Gas Co., Ltd. (Akita Branch district) Tobu Gas Co., Ltd. (Fukushima/Ibaraki/Ibaraki-Minami Branch Saibugas Co., Ltd. district) Previous Revision of Balance Previous Revision of Balance Previous Revision of Balance revision A this time B (B A) revision A this time B (B A) revision A this time B (B A) Previous Revision of Balance revision A this time B (B A) Previous Revision of Balance revision A this time B (B A) Previous Revision of Balance revision A this time B (B A) Previous Revision of Balance Previous Revision of Balance revision A this time B (B A) revision A this time B (B A) Cost of network subject to comparative assessment Supply-demand adjustment cost Repair cost 937 1, Taxes and dues Fixed asset retirement cost Depreciation cost Bio-gas procurement cost Demand survey and development cost Cost of settlement between utilities Non-operating expense Corporate tax, etc. Business reward (Rate-based, business reward rate) Deductions (Business miscellaneous income, miscellaneous income, income from settlement between utilities) NW Total cost ,761 2, ,018 1, Members of the Specialized Meeting for Rates Assessment (Chairman) (Titles omitted) Junji Annen, Professor, Law School of Chuo University Masanori Maruo, Managing Director, SMBC Nikko Securities, Inc. Emiko Minowa, Certified Public Accountant, Partner, Deloitte, Touche Tohmatsu LLC Reiko Akiike, Senior Partner and Managing Director, The Boston Consulting Group Toru Kajikawa, Representative Partner, Chairman, Grant Thornton Taiyo LLC Kikuko Tatsumi, Executive Advisor, Nippon Association of Consumer Specialists Toshihiro Matsumura, Professor, Institute of Social Science, The University of Tokyo Kenichi Minami, Partner, Attorney-at-law, Nishimura & Asahi Hirotaka Yamauchi, Professor, Graduate School of Commerce and Management, Hitotsubashi University History of assessment The end of July, 2016 Gas utilities application for approval for transportation The 18th (October 12) Supply-demand adjustment cost, Demand service rates development cost, Cost of network subject to August 1 Opinion hearing held by the Minister of Economy, Trade comparative assessment and Industry with the Electricity and Gas Market The 19th (October 26) Cost allocation and rate make, Issues to be discussed Surveillance Commission further [1] The 20th (November 10) Issues to be discussed further [2] <Assessment by the Specialized Meeting for Rates Assessment> The 21st (December 1) Review of assessment policy The 14th (August 9) Presentation of outline (Tokyo, Toho and Osaka) December 1 Summarization of assessment policy in the The 15th (August 25) Premise plan, Management efficiency improvement, Specialized Meeting for Rates Assessment Charge of tax and dues, Non-operating expense, December 7 Formulation of assessment policy in the 61st Electricity Deductions and Gas Market Surveillance Commission The 16th (September 13) Supply-demand adjustment cost, Demand survey and development cost, Bio-gas procurement cost The 17th (September 29) Capital investment-related expense, Repair cost, Cost of settlement between utilities and Revenue Assessment policy (main points) Regarding assessment policy of application for approval for transportation service provisions * Amounts mentioned are the amounts applied for by each utility (3 years average) and cost-cut amount (or reflected amount) resulted from assessment by the Electricity and Gas Market Surveillance Commission (rounded off to the nearest 100 million yen). * Amounts of Tokyo Gas Co., Ltd. and Toho Gas Co., Ltd. are the total amounts of each district. Premises plan (Assumed demand) [Added volume: 422 million m 3 to 13.7 billion m 3 for Tokyo, 25 million m 3 to 3.8 billion m 3 for Toho, 1 million m 3 to 8.8 billion m 3 for Osaka, 1 million m 3 to 0.9 billion m 3 for Saibu] For Tokyo Gas Co., Ltd. and Toho Gas Co., Ltd., decrease of demand due to easing of regulations on a double pipeline which was considered to be excessive was not acceptable. For Osaka Gas Co., Ltd., decreases of demand due to change of residence or switching to other fuel which was considered to be excessive was not acceptable. Improvement of management efficiency [Additional reduction: 1800 million to 11 billion for Tokyo, 300 million to 1.7 billion for Toho, 800 million to 2.3 billion for Osaka, 30 million for Tobu, 60 million for Saibu] (amount included in repair cost and capital investment-related expenses, etc.) A management efficiency improvement rate of 11%, which was considered to be achievable, was demanded from the leading utilities. As for Tokyo Gas Co., Ltd. and Toho Gas Co., Ltd., a portion of efficiency improvement which was considered to be excessive was not acceptable, because some part of their improvement efforts and calculation methods in the past were not reflecting the actual situation. Cost of network subject to comparative assessment [Cost-cut amount: 230 million from billion for Tokyo, 150 million from 27.8 billion for Toho, 230 million from 91.2 billion for Osaka, 80 million from 11.8 billion for Saibu] Based on the realization ratio of pipeline extension (balance between newly built pipes and abolished ones) according to the supply plan of the past, the portion which was considered to be excessive was deducted. Supply-demand adjustment cost [Cost-cut amount: 700 million from 3 billion for Tokyo, 40 million from 0.6 billion for Toho, 300 million from 1.7 billion for Osaka, 200 million from 0.9 billion for Saibu] Out of the capacity of manufacturing facilities secured for supply-demand adjustment, portions which were considered to be excessive were deducted. Repair Cost [Cost-cut amount: 300 million from 32.4 billion for Tokyo, 60 million from 7.7 billion for Toho, 200 million from 25.6 billion for Osaka, 10 million from 0.2 billion for Tobu, 10 million from 1.7 billion for Saibu] Out of ordinary repair cost, a portion which was considered to be excessive was deducted. Regarding Tokyo Gas Co., Ltd. and Toho Gas Co., Ltd., the number of gas meters to be replaced was considered excessive. Therefore, the corresponding portion of repair cost was deducted. Capital investment-related expense [Cost-cut amount: 2700 million from billion for Tokyo, 300 million from 31.9 billion for Toho, 800 million from 54.8 billion for Osaka, 70 million from 4 billion for Tobu, 100 million from 10 billion for Saibu] Some of the existing facilities (such as sites for pressure regulators) which were redundant or not in operation and some of newly planned facilities of which the construction plan was not fully reasonable were removed from the rate base. The corresponding depreciation and business reward were also deducted. (Investment for aging of facility) Regarding Tokyo Gas Co., Ltd., the applied quantity of gray cast iron pipe and valve driving device, etc. were considered to be excessive. Therefore the corresponding portion was deducted. Costs for main valves and corrosion protection equipment of which the unit price mentioned in the application was too high were deducted. Charge of tax and dues, non-operating expense, exclusions [Cost-cut amount: 500 million from 30.7 billion for Tokyo, 60 million from 5.8 billion for Toho, 200 million from 19.5 billion for Osaka, 10 million from 0.5 billion for Tobu, 100 million from 2.5 billion for Saibu] (excluding settlement between utilities) Regarding Osaka Gas Co., Ltd., the real estate acquisition tax which was based on the record of the past 3 years was reduced to the amount based on the most recent record. For Tokyo Gas co., Ltd., items to be recorded as exclusion items were added. Bio gas procurement cost [Cost-cut amount: 5 million from 30 million for Tokyo, 1 million from 10 million for Toho, 11 million from 60 million for Osaka] The portion exceeding 80% of excess bio gas generated in the supply area was deducted. Demand survey and development cost [Cost-cut amount: 4.3 billion from 6.9 billion for Tokyo, 1.3 billion from 2 billion for Toho, 0.7 billion from 3 billion for Osaka] Regarding demand survey cost of Tokyo Gas Co., Ltd. and Toho Gas Co., Ltd., the portions for their own supply area and the portions of which the amount was considered to be excessive were deducted. Out of the demand development cost, the portion for areas where pipeline facilities had been provided to a substantial extent was deducted. Regarding the cost for development of demand over 100,000 m 3, the payment amount for some of them were considered to be excessive, so a portion was deducted. Cost of settlement between utilities [ 100 million added to 3.4 billion for Tokyo, 700 million deducted from 1.5 billion for Osaka, 400 million added to 1 billion for Tobu] The above adjustment reflects the updated costs requirement based on unit prices on the table of rates for settlement between utilities submitted by upstream specified gas pipeline utilities by the end of October Revenue from settlement between utilities [Tokyo: 100 million added to 6.8 billion] Revenue from trade which was not expected at the time of application was added for Tokyo Gas Co., Ltd. Cost allocation and rate make It has been confirmed that appropriate charging/attribution/allocation was done by using appropriate criteria. For Tokyo Gas Co., Ltd., the unit rate of base rate, etc. were changed so that the proportion of transportation service charge to retail charge would be 50% or more in case of gas consumption volume of 0 m 3. For Tokyo Gas Co., Ltd., discounted rate on the premise condition of the use of co-generation system was not acceptable. Transportation service rate (unit rate) based on the assessment policy (per m 3 ) (Note) Figures in parentheses are different from the figures in the application. [Tokyo Gas Co., Ltd.] (Tokyo district, etc.) The rate was reduced to approximately ( 1.25) due to cost reduction of approximately 8.2 billion. (Gunma district and others) The rate was reduced to approximately ( 1.53) due to cost reduction of approximately 0.3 billion. (Yotsukaido 12A district) The rate was reduced to approximately ( 1.80) due to cost reduction of approximately 0.01 billion. [Toho Gas Co., Ltd.] The rate was reduced to approximately ( 0.64) due to cost reduction of approximately 1.9 billion. [Osaka Gas Co., Ltd.] The rate was reduced to approximately ( 0.35) due to cost reduction of approximately 3.1 billion. [Tobu Gas Co., Ltd.] (Akita district) The rate was changed to approximately ( 3.10) due to cost reflection of approximately 0.1 billion. (Fukushima and Ibaraki districts) The rate was changed to approximately ( 0.70) due to cost reflection of approximately 0.2 billion. [Saibugas Co., Ltd] The rate was reduced to approximately ( 0.61) due to cost reduction of approximately 0.5 billion. *1 Unit rates of Tokyo Gas Co., Ltd. and Toho Gas Co., Ltd. were influenced proportionally by the review of the demand forecast. *2 Because of an additional cost, etc. for system change, some costs are increased compared with those mentioned in the application. 48

49 Chapter 4 Strict and fair surveillance, etc. to ensure proper trade in the gas market Section 1 Assessment of competitive situation in the gas market (1) Record of switching to new entrants According to the Gas Trading Report of August 2017, in the city gas market which has been newly liberalized by the full liberalization of the gas retail market, the percentage of consumers who have switched their contract to newly registered gas retailers (hereinafter referred to as New Gas Retailer ) has reached approximately 1.2%, on a whole Japan basis. [Record of switching to New Gas Retailers in the city gas (for household) market (as of August 2017)] Numbers of switching (cases) Rate (%) Hokkaido 0 0.0% Tohoku 0 0.0% Kanto 45, % Chubu & Hokuriku 42, % Kinki 180, % Chugoku & Shikoku 0 0.0% Kyushu & Okinawa 27, % Throughout the country 295, % (Source) Gas Trading Report of Electricity and Gas Market Surveillance Commission (record as of August 2017) After the full liberalization, the share of New Gas Retailers has been increasing not only for household but also for industry and commercial consumers, and the share in terms of gas volume sold has reached 11.5% of the total city gas market in August

50 [Market share of New Gas Retailers in the city gas market (in terms of gas volume sold) (record as of August 2017)] Share of New Gas Retailers in total gas volume sold (Source) Gas Trading Report of Electricity and Gas Market Surveillance Commission (record as of August 2017) * Share of New Gas Retailers for household includes the share of cross-border deemed gas retailers (i.e. gas general utilities and community gas utilities), and that for consumer types other than household does not include the same. April 2017 May 2017 June 2017 July 2017 August 2017 For household For commercial use For industry use Total 50

51 (2) Status of new entry (including cross-border entries) There are 17 areas where new entry (including cross-border entry) has been active, and many of them are in the Kanto region. Territory in charge Kanto [Areas where new entry (including cross-border entry) has been active (for household) 1 2 Entered area Tokyo Gas Co., Ltd. (Tokyo district, etc.) Washinomiya Gas Co., Ltd. (record as of August 2017)] Major municipalities in the area 23 Wards in Tokyo Kazo city, Kuki city Newly entered utilities Nippon Gas Co., Ltd., Tosai Gas Inc., Kawahara Jitsugyo Co., Ltd., Shinnihon Gas Co., Ltd., Higashinihonn Gas Corporation, Lemon Gas Co., Ltd., TEPCO EP Nippon Gas Co., Ltd., Tosai Gas Inc., Shinnihon Gas Co., Ltd. 3 Tochigi Gas Co., Ltd. Tochigi city Nippon Gas Co., Ltd., Kitanihonn Gas Co., Ltd. 4 Tobu Gas Co., Ltd (Ibaraki and Ibaraki- Minami district) 5 Noda Gas Co., Ltd. 6 Bushu Gas Co., Ltd. 7 Tatebayashi Gas Co., Ltd. 8 Hatano Gas Inc 9 Atsugi Gas Corporation 10 Buyo Gas Co., Ltd. 11 Daito Gas Inc. 12 Akishima Gas Co., Ltd. 13 Kakuei Gas co., Ltd. (Sakura district) 14 Tosai Gas Inc. Mito city, Tsuchiura city Noda city, Nagareyama city Kawagoe city, Tokorozawa city, etc. Tatebayashi city Hatano city, Hiratsuka city, etc. Atsugi city, Hiratsuka city, etc. Fussa city, Hamura city, etc. Kawaguchi city, Tokorozawa city, etc. Akishima city, Tachikawa city, etc. Sakura city Saitama city, Kazo city, etc. Nippon Gas Co., Ltd., Higashinihonn Gas Corporation Nippon Gas Co., Ltd., Higashinihonn Gas Corporation Nippon Gas Co., Ltd. Nippon Gas Co., Ltd. Nippon Gas Co., Ltd. Nippon Gas Co., Ltd. Nippon Gas Co., Ltd. Nippon Gas Co., Ltd. Nippon Gas Co., Ltd. Nippon Gas Co., Ltd. Tokyo Gas Co., Ltd. Chubu 15 Toho Gas Co., Ltd. Nagoya city, etc. Chubu Electric Power Co., Inc. Kinki 16 Osaka Gas Co., Ltd. Osaka city, etc. Kansai Electric Power Co., Inc. Kyushu 17 Saibugas Co., Ltd. Fukuoka city, Kitakyushu city, etc. Kyushu Electric Power Co., Inc. (Source) Gas Trading Report of Electricity and Gas Market Surveillance Commission (record as of August 2017) * Utilities listed in the column of Newly entered utilities are those which have record of acquiring consumers in the corresponding area as of August

52 The numbers of areas in which new entry (including cross-border entry) has been active account for approximately 10% of the entire area numbers. On the other hand, however, it accounts for 76% in terms of the gas volume sold. [Status of new entry (for household) by supply area] Proportion of numbers of supply area (existence or non-existence of new entry) (August 2017) Entered areas 17 Proportion of city gas volume sold sorted by supply area (existence or non-existence of new entry) (August 2017) Areas with no new entrant 24%, 80 million m 3 Areas with no new entrant 201 Entered areas 76%, 260 million m 3 (Source) Gas Trading Report of Electricity and Gas Market Surveillance Commission (record as of August 2017) * Entered area means a supply area where a new utility exists as of the end of August

53 Section 2 Administrative guidance, etc. for gas retailers A new entry to gas retail business was fully liberalized in April Since then, all consumers including households have the liberty to choose any gas utilities or rate plans they like. Under such circumstances, surveillance, etc. on business activities of gas utilities were conducted in accordance with Guidelines on Gas Retail Business to facilitate the appropriate trade of gas retail supply. Such surveillance includes but is not limited to giving administrative guidance to utilities that have conducted practices that may be problematic in the light of the Gas Business Act with regard to provision of information to consumers and forms/contents, etc. of contracts. Regarding inappropriate business activities, etc. notified to the Commission s consultation desk, etc., in addition to factual investigation and administrative guidance, press releases were organized three times during December 2016 to August 2017 in collaboration with the National Consumer Affairs Center of Japan to present examples of such consultation and advice. (For reference) Implementation status of press release The 1st on December 15, 2016 Re: Conclusion of Partnership Agreement with National Consumer Affairs Center of Japan The 2nd on March 30, 2017 Re: Details of consultation up to February 2017 The 3rd on April 28, 2017 Re: Details of consultation up to April 2017 [Status of Consultation from Consumers] Trend of number of cases of consultation with the National Consumer Affairs Center of Japan and Consumer Center regarding Liberalization of Gas Market case April to June 2016 July to September October to December After January 2017 onward * Data registered by April 14, 2017 Trend of number of cases of consultation received by the Consultation Desk of the Electricity and Gas Market Surveillance Commission regarding Liberalization of Gas Market Examples of consultation I was given an explanation that the name of the gas utility with which I had a contract would be changed, and accepted the explanation. However, the document I received at a later date mentioned a name of a company, etc. different from the company with which I had a contract, and the description on the documents stated that I had accepted a completely new contract. I was given the explanation this area has become a territory that our company is in charge of, and I made a contract with that utility for gas supply, because I misunderstood that I had no choice but to change the contract. At a later date, I found that the explanation was not true. It has been reported that there were cases where city gas utilities were doing business using false information. Neither case has been confirmed concerning the fact that any existing city gas utility changed its name nor any supply territory was transferred from one city gas utility to the other. One utility called me under the name of a gas utility with which I had a contract and used the words our valued customer. I thought the call was to offer a new rate plan associated with the liberalization of the gas market, and I gave my personal information such as customer number in response to their questions. At the end of the conversation, however, they told me that the contract would be made with another utility, so I was surprised and rejected them sending a contract document to me. I am feeling uneasy about the possibility for the abuse of my personal information. November 2016 December January 2017 February March Apri * Data registered by February 28, 2017 User Number (Customer number) and Identification number for supply point, which are mentioned on meter reading slips are important information that can identify individuals. Please do not share such information easily, and, whenever you are asked for such information by anyone, verify the identity of the person and make a note of it. 53

54 Section 3 Administrative guidance, etc. for general gas pipeline service providers 1. Issues on influence on consumer s choice of gas retailer due to inadequate framework of operation, etc. There was a case in the area a which was a part of the supply territory of general gas pipeline service provider A around the end of March 2017 due to inadequacy of A s operation framework, etc. The case caused confusion to consumers living in the area about the choice of gas retailer. Upon receipt of a report from the related gas retailer, the Commission looked into the facts and gave A administrative guidance on improvement of operation framework and on careful support given to related gas retailers. As a result of investigation to check the occurrence of similar cases with the other general gas pipeline service providers, the Commission found inadequacy, etc. of operation framework also in some of the utilities and gave administrative guidance on improvement. In the meantime, no such influence on consumers has occurred yet because there was no new gas retailer or business operation started yet in the territory of the said utilities. 2. An issue of inadequate handling of application for transportation service 1 Gas retailer A submitted multiple applications for transportation service to a general gas pipeline service provider B, but B responded to A after assessment saying that the applications were not acceptable. Because A was not convinced by the said response as well as the explanation provided by B, A consulted with the Commission and requested for investigation to verify if the response by B was reasonable and appropriate. As a result of investigation in response to A s request, the Commission determined that the explanation made by B was not considered to be a justifiable reason to reject providing transportation service, and gave administrative guidance suggesting that B respond again taking into consideration the points suggested by the Commission. 3. An issue of inadequate handling of application for transportation service 2 Gas retailer C submitted an application for transportation service to a general gas pipeline service provider D, and D responded to C after assessment saying that the application was acceptable subject to a certain premise condition. Because C was not convinced by the said response as well as the explanation provided by D, C consulted with the Commission and requested for investigation to verify if the response by D was reasonable and appropriate. As a result of investigation in response to C s request, the Commission found some part of the explanation made by D to be debatable in terms of reasonability, and suggested that point to D. Based on such a suggestion, D gave an answer again to C, and C accepted the answer as reasonable. Then they agreed based on the new answer and the issue was resolved. 54

55 Section 4 Audit (1) Outline of audit Audit was conducted on general gas utilities and gas pipeline service providers in accordance with provisions of Article 45-2 of Gas Business Act before the revision. The total number of utilities and service providers audited was 228. Under the circumstances of full liberalization of the gas retail market from April 2017, the audit of FY2016 focused on the check of prohibited activities in gas business associated with transportation services, as was the case with electricity business, and examined if there is any practices that may be problematic in the light of fair and effective competition defined in Guidelines for Proper Gas Trade (revised on February 6, 2017, Japan Fair Trade Commission, METI). As a result of the audit conducted for FY2016, 65 items of audit findings were reported by the officials that conducted the audit. The Commission examined the report and determined that there was neither an issue which was subject to recommendation to general gas utilities, etc. based on Article 47-7 of Gas Business Act before the revision nor an issue which was subject to recommendation to the Minister based on Article 47-8 of the same act. However, the Commission gave oral administrative guidance on required matters to 23 utilities (on 26 items) and written administrative guidance on required matters to nine utilities (on 39 items) so that voluntary improvement of utilities can be facilitated for the future business operations. [Breakdown of Administrative Guidance] (unit: case) Number of cases (1) Audit on operational procedure, etc. of general provisions 13 (2) Audit on financial statement 11 (3) Audit on sectoral profit and loss 15 (4) Audit on profit and loss of transportation services 25 (5) Audit on prohibited activities associated with transportation services 0 (6) Audit on other necessary items 1 Total 65 55

56 [Items to be handled by the headquarters of the Ministry] i. Findings that can be considered minor, such as errors in writing: (Non-compliance with laws and regulations but still minor) (1) Audit on operational procedure, etc. of general provisions (no applicable case found) (2) Audit on financial statement (no applicable case found) (3) Audit on sectoral profit and loss 1 Details of finding Regarding the accounting process for LNG terminal, inappropriate cases were found where items to be allocated to each suitable functional cost item (i.e., LNG Receiving, LNG Storage and Other Plants, etc.) were all allocated to Other Plants. Details of administrative guidance Written guidance was given for proper processing in accordance with accounting ordinance for sectoral profit and loss, company s in-house rules and others. 2 Regarding allocation of General and Administrative Expenses to functional cost items, inappropriate cases were found where the wrong factor was applied to the calculation of allocation amount. Written guidance was given for proper processing in accordance with accounting ordinance for sectoral profit and loss, company s in-house rules and others Regarding allocation of General and Administrative Expenses, which should be allocated to territories in proportion to the number of installed meters, inappropriate cases were found in which wages of temporary staff of the headquarters were omitted from the calculation of allocation. Regarding the functional cost allocation factor (in proportion to the number of employees) for the calculation of sectoral profit and loss, which should deduct employees to be transferred to construction in progress account, inappropriate cases were found where the number of employees of construction in progress was wrong. Regarding the functional cost allocation factor (in proportion to value of fixed assets) for the calculation of sectoral profit and loss, an amount of meters, which was included in the assets directly charged to exclusive facilities for transportation service, was not deducted from the fixed asset amount of functional meters and was counted double. Also, an inappropriate case was found in which an amount related to exclusive facility for wholesale, which should be deducted from pressurized transfer function, was deducted from vaporization function. Written guidance was given for proper processing in accordance with accounting ordinance for sectoral profit and loss, company s in-house rules and others. Written guidance was given for proper processing in accordance with accounting ordinance for sectoral profit and loss, company s in-house rules and others. Written guidance was given for proper processing in accordance with accounting ordinance for sectoral profit and loss, company s in-house rules and others. 56

57 Regarding the functional cost allocation factor (other operations out of General and Administrative Expenses) for the calculation of sectoral profit and loss, an inappropriate case was found where 50% of secretary expenses of directors who have concurrent duties in multiple major sectors (such secretary expenses are a part of expenses of the Secretary Department) were directly charged to the corresponding major sectors despite the fact that that have no concurrent duties. Regarding the functional cost allocation factor (in proportion to experiment and research-related expenses out of General and Administrative Expenses) for the calculation of sectoral profit and loss, an inappropriate case was found in which pressurized transfer function-related research expenses out of R&D expenses were classified as vaporization function-related research expenses. Regarding functional cost allocation of retirement cost of fixed assets for the calculation of sectoral profit and loss, an inappropriate case was found where expenses, which should be allocated to each function, were directly charged to common expenses for consumers. Regarding the functional cost allocation factor (in proportion to the number of employees) for the calculation of sectoral profit and loss, an inappropriate case was found where employees of organizations which were dismantled at the end of FY2014 were included in the calculation of the functional cost allocation factor of manufacturing cost of FY2015. Written guidance was given for proper processing in accordance with accounting ordinance for sectoral profit and loss, company s in-house rules and others. Written guidance was given for proper processing in accordance with accounting ordinance for sectoral profit and loss, company s in-house rules and others. Written guidance was given for proper processing in accordance with accounting ordinance for sectoral profit and loss, company s in-house rules and others. Written guidance was given for proper processing in accordance with accounting ordinance for sectoral profit and loss, company s in-house rules and others. (4) Audit on profit and loss of transportation services 1 Details of finding Regarding the accounting process for LNG terminal, inappropriate cases were found in which items to be allocated to each suitable functional cost item (i.e., LNG Receiving, LNG Storage and Other Plants, etc.) were all allocated to Other Plants. Details of administrative guidance Written guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. 2 Regarding allocation of General and Administrative Expenses to functional cost items, inappropriate cases were found where the factor based on which the allocation amount should be calculated was wrong and different factor was applied. Written guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. 57

58 Regarding allocation of General and Administrative Expenses, which should be allocated to territories in proportion to the number of installed meters, inappropriate cases were found in which wages of temporary staff of the headquarters were omitted from the calculation of allocation. Regarding allocation of the retirement cost of fixed asset to functional cost items, which should be done in proportion to the value of fixed asset, an inappropriate case was found where it was allocated in proportion to the number of employees. An inappropriate case was found where the factor in proportion to fixed asset value, which is used for the allocation of manufacturing cost to functional cost items, was wrong. Regarding inventory shortage, which shall be allocated to each functional cost item in proportion to the number of employees, an inappropriate case was found where it was allocated to a specific function (generation facility). Regarding the functional cost allocation factor (extraordinary loss) for the calculation of profit and loss of transportation service, an inappropriate case was found in which appraisal losses of investments in securities and the same of subsidiaries and affiliates (included in extraordinary loss), which shall be allocated to gas business and other businesses in proportion to their sales amounts, were all allocated to the loss of gas business. Written guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. Written guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. Written guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. Written guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. Written guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. 8 9 Regarding the functional cost allocation factor (in proportion to the number of employees) for the calculation of profit and loss of transportation service, which shall be calculated with deduction of employees to be transferred to a construction in progress account, an inappropriate case was found in which the number of such employees to be transferred was wrong. Regarding the functional cost allocation factor (in proportion to value of fixed assets) for the calculation of profit and loss of transportation service, the amount of meters included in the assets directly charged to exclusive facilities for transportation service was not deducted from the fixed asset amount of functional meters and was counted double. Also, an inappropriate case was found where an amount related to exclusive facility for wholesale, which should be deducted from the pressurized transfer function, was deducted from the vaporization function. Written guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. Written guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. 58

59 Regarding the functional cost allocation factor (other operations out of General and Administrative Expenses) for the calculation of profit and loss of transportation service, an inappropriate case was found in which 50% of secretary expenses of directors who have concurrent duties in multiple major sectors (such secretary expenses are a part of expenses of the Secretary Department) were directly charged to the corresponding major sectors despite the fact that that have no concurrent duties. Regarding the functional cost allocation factor (in proportion to experiment and research-related expenses out of General and Administrative Expenses) for the calculation of profit and loss of transportation service, an inappropriate case was found where pressurized transfer function-related research expenses out of R&D expenses were classified as vaporization function-related research expenses. An inappropriate case was found where the accumulated amount of excess profit of the fiscal year mentioned in the table for management of accumulated amount of excess profit was undervalued due to erroneous calculation. Regarding functional cost allocation of retirement cost of fixed assets for the calculation of profit and loss of transportation service, an inappropriate case was found in which expenses, which shall be allocated to each function, were directly charged to common expenses for consumers. Regarding the functional cost allocation factor (in proportion to the number of employees) for the calculation of profit and loss of transportation service, an inappropriate case was found in which employees of organizations which were dismantled at the end of FY2014 were included in the calculation of the functional cost allocation factor of manufacturing cost of FY2015. Regarding operating revenue (revenue of compensation money) for the calculation of profit and loss of transportation service, an inappropriate case was found in which the calculation of revenue of compensation money of operating revenue was incorrect. An inappropriate case was found in which an inventory shortage was not deducted from operation expenses in the calculation of operating capital of the asset schedule of transportation service. Regarding the calculation of the difference between predicted cost and actual expense and the calculation of retained earnings equivalent in the statement of excess profit, an inappropriate case was found where the amount was undervalued because actual expenses before addition of the amount of business income was used instead of the comprehensive cost used for the calculation of the latest tariff rates. Written guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. Written guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. Written guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. Written guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. Written guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. Written guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. Written guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. Oral guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. 59

60 18 Regarding the calculation of facility account (tangible) in the statement of transportation service assets, which shall be the value of either an average of the beginning and the end of term or the balance in the middle of term, an inappropriate case was found where the value of machinery and equipment, which were procured during the term, was added to the average of the beginning and the end of term. Oral guidance was given for proper processing in accordance with Calculation Ordinance for Profit and Loss of Transportation Services and the company s in-house rules. (5) Audit on prohibited activities associated with transportation services (no applicable case found) (6) Audit on other necessary items (no applicable case found) ii. Other items to be reported (Not violation of laws and regulations but matters that require improvement) (1) Audit on operational procedure, etc. of general provisions (no applicable case found) (2) Audit on financial statement (no applicable case found) (3) Audit on sectoral profit and loss 1 case (oral guidance) (4) Audit on profit and loss of transportation services (no applicable case found) (5) Audit on prohibited activities associated with transportation service (no applicable case found) (6) Audit on other necessary items (no applicable case found) 60

61 [Items to be handled by the Bureaus of Economy, Trade and Industry] i. Findings that can be considered minor, such as errors in writing: (Non-compliance with laws and regulations but still minor) (1) Audit on operational procedure, etc. of general provisions 1 Details of finding When gas rates are revised in the middle of a month, gas bills should be calculated on a prorata basis. However, some cases were found in which the rates after reduction were applied flatly to the entirety of such a month. Details of administrative guidance Written guidance was given for proper processing in accordance with the General Provisions for Supply, etc. (2) Audit on financial statement 1 Details of finding The following cases were found: For a consumer, who had fallen behind on his gas bill for a long time, a substantial amount of unpaid balance was accumulated because no adequate measures such as gas outage were taken but only quarterly reminders, etc. were carried out. Unrecoverable gas bills due to a customer s death or bankruptcy, etc. were recorded as accounts receivable. Details of administrative guidance Written guidance was given for proper processing in accordance with the General Provisions for Supply, company s in-house rules and accounting ordinance for gas business, etc. 2 A case was found where expenses spent for an acquisition by construction were not recorded to the corresponding tangible fixed asset account promptly after the completion of construction. Written guidance was given for proper processing in accordance with accounting ordinance for gas business and company s in-house rules, etc. (3) Audit on sectoral profit and loss 1 Details of finding A case was found where production-related repair costs, which should be allocated according to functional cost items, were all allocated to other factories. Details of administrative guidance Oral guidance was given for proper processing in accordance with accounting ordinance for sectoral profit and loss and company s in-house rules, etc. 2 Regarding appliance sales-related profits and expenses, which can be allocated directly to each sector, a case was found in which the allocation was prorated according to the ratio of number of arbitration extension cases. Oral guidance was given for proper processing in accordance with accounting ordinance for sectoral profit and loss and company s in-house rules, etc. 61

62 3 Regarding appliance sales-related profits of less than 1 million yen, which can be allocated directly to each sector, a case was found where the allocation was prorated according to the ratio of number of arbitration extension cases. (4) Audit on profit and loss of transportation services A case was found where the calculation of the investment amount for the term to be mentioned in the statement of pipeline investment was wrong. Regarding the calculation of taxes and dues, a case was found where all of property tax and road occupation charge, etc. were allocated based on the proportion of amount of fixed assets. Regarding the statement of transportation service asset, a case was found in which amounts of construction in the progress account, equipment account (tangible), intangible assets and long-term prepaid expenses were wrong due to errors in the fiscal year of book value at the beginning of a term of tangible fixed assets and in the amount of items of other sector specified. Regarding items of the equipment account (tangible), an asset which should be classified as a transportation service asset was erroneously classified as a non-transportation service asset. Oral guidance was given for proper processing in accordance with accounting ordinance for sectoral profit and loss and company s in-house rules, etc. Oral guidance was given for proper processing in accordance with accounting ordinance for transportation service profit and loss and company s in-house rules, etc. Oral guidance was given for proper processing in accordance with accounting ordinance for transportation service profit and loss and company s in-house rules, etc. Oral guidance was given for proper processing in accordance with accounting ordinance for transportation service profit and loss and company s in-house rules, etc. Oral guidance was given for proper processing in accordance with accounting ordinance for transportation service profit and loss and company s in-house rules, etc. 5 6 Regarding the calculation of statement of transportation service asset, an omission of inclusion into construction in the progress account and double inclusion of an amount that could not be charged directly were found. A case was found in which the Form No. 4 List of Accounting Procedure established by Gas Utilities based on Article 6 of Ordinance for Accounting Rules on Gas Transportation Service Profit and Loss was not released to the public. Oral guidance was given for proper processing in accordance with accounting ordinance for transportation service profit and loss and company s in-house rules, etc. Written guidance was given on proper publishing in accordance with accounting ordinance for transportation service profit and loss. (5) Audit on prohibited activities associated with transportation services (no applicable case found) (6) Audit on other necessary items (no applicable case found) 62

63 ii. Other items to be reported (Not violation of laws and regulations but matters that require improvement) (1) Audit on operational procedure, etc. of general provisions 12 cases (oral guidance) (2) Audit on financial statement 9 cases (oral guidance) (3) Audit on sectoral profit and loss 2 cases (oral guidance) (4) Audit on profit and loss of transportation services 1 case (oral guidance) (5) Audit on prohibited activities associated with transportation service (no applicable case found) (6) Audit on other necessary items 1 case (oral guidance) (2) Efforts toward audit quality improvement, etc. Man-hours required for audit and volume of information obtained through audit have been increasing year by year due to reasons such as the following (number of audited utilities was 11 for the audit of FY2015 and 240 for FY2016): Increase of number of utilities to be audited because auditing of gas business was added to the role of the Commission, Changes and subdivision of audit items due to revisions of laws and regulations, etc. associated with the reform of electricity and gas systems, and Diversification of purposes of audit in relation to the legal separation in Under such circumstances, efforts to enhance the knowledge management over the entire area of auditing are being made aiming for audit quality improvement, enhancement of functionality of audit and realization of effective and efficient audit by making use of methodologies of audit by certified public accountants for documentation of planned audit schedules, implemented audit procedures and conclusions from audit results, etc. Section 5 Trend of heat supply business As a result of the partial enforcement of the 3rd Step Revision of Act (for heat supply business-related part) on April 1, 2016, a deemed heat supplier which was actually operating heat supply business was treated as a registered supplier under the said law. Thus, one additional utility was newly registered for the period from April to August of the year. In addition, one application for registration was received during the period from September 2016 to August 2017 and one application was registered after assessment by the Commission and the Agency of Natural Resources and Energy. The total cumulative number of received applications for registration from April 2016 when the receipt of application was started was two and two applications were registered after assessment by the Commission and the Agency of Natural Resources and Energy (Number of registered utilities as of the end of August 2017 is 78). The assessment of applications has been conducted in accordance with laws and regulations respectively by the Agency of Natural Resources and Energy from the viewpoints of potentiality, etc. to secure supply capacity necessary to meet the maximum demand of heat, and by the Commission from the viewpoints whether it falls under a person who is deemed to be inappropriate to ensure convenience in daily life and business operation of consumers who receive the heat supply. 63

64 Chapter 5 Section 1 Efforts for higher efficiency of the gas market and promotion of competition Regarding post facto assessment of gas transportation service rates (a new system of order for application for approval for rate change regarding the Wheeling Service provisions) To promote the full liberalization of the gas retail market in April 2017, it was stipulated that transportation service rates require approval when the service launches or the rates are raised but they require only notification, not approval, when the rates are reduced, in view of the promptness and incentives for utilities for higher efficiency. Also, post facto regulations were strengthened so that low transportation service rates are materialized. In the 27th Gas Systems Reform Subcommittee held in January 2016 at the Agency for Natural Resources and Energy, the direction of strengthening of post facto regulations was set towards introduction of new change order standards, which focus on a difference of transportation service cost (unit cost) per demand volume from the estimated value, in addition to the existing stock management system. Because of the foregoing, the discussions in the Specialized Meeting for Policy Design concluded as follows so that the system, which focuses on a difference of transportation service cost (unit cost) per demand volume from the estimated value, can be newly introduced as post facto regulations on transportation service rates after liberalization of the gas retail market. (Main points of the conclusion) It is appropriate that the system of change order for transportation service rates to be additionally introduced in FY2017, which focuses on the unit rate of transportation service cost, will be the same system as the post facto regulations by management of difference rate, which was introduced to electricity wheeling service rates in FY2016. The reference value to check the difference rate between the estimated unit rate and the actual unit rate will be set to -5% as was the case with electricity business. Thereafter, based on discussions in the Specialized Meeting for Policy Design, the Agency for Natural Resources and Energy revised (1) Accounting Ordinance for Profit and Loss of Transportation Service for Gas Business, (2) Assessment Criteria, etc. for Disposition by the Minister of Economy, Trade and Industry based on the Gas Business Act, and others. Then the post facto assessment, which focuses on a difference of transportation service cost (unit cost) from the estimated value, was decided to be introduced in FY2017 in addition to the existing stock management system. 64

65 [Post facto assessment to be introduced to gas transportation service rates from FY2017] Post facto regulations by management of the difference rate introduced to gas transportation service rates from FY2017 Check of difference rate To check the difference rate between estimated unit cost and actual unit cost. If the difference exceeds the specified rate (- 5%), proceed to Step 2. Explanation by the utility The utility is requested to explain the appropriateness of maintaining the level of current transportation service rates. If the government determines that the explanation is not reasonable, proceed to Step 3. Request for reduction of transportation service rates If no notification of voluntary rate reduction is submitted by the first day of the 2nd fiscal year after the fiscal year during which the difference rate exceeded the specified rate, an order for application for approval for rate change will be given. An order for application for approval for rate change is enforced. Difference rate (%) = (actual unit cost (actual expense/actual demand volume) estimated unit cost (estimated cost/estimated demand volume) 1) x 100 (Note) If the cost calculation period is three years, the actual record of unit cost shall be an average of the last three years. 65