Consideration of the rate-of-return regulation in the power industry

Abstract

This paper analyzes the inefficiency caused by the rate-of-return regulation in the power industry. The regulation is scheduled to continue in the power transmission and distribution market even after the coming liberalization. It is necessary to deepen the discussion about the inefficient regulation method of the rate-of-return regulation. First, to quantitatively grasp the inefficiency of the production cost caused by the regulation, financial data of Tokyo Electric Power Company is examined. The data catches the company at a time when it was under strong pressure for rationalization. It shows that 6.8% inefficiency existed in production costs before rationalization. In addition, the information made public regarding rationalization shows us quantitative and qualitative efficiency gains for each accounting title, which have not been revealed up to now. Second, the paper analyzes the mechanism by which the regulation method causes electricity rates to become higher than the actual cost. A high rate that consumers should not rightfully have to pay is being charged. It turns out that in the regulation, a mechanism exists in which the funds circulate cumulatively without being returned to consumers and shareholders. This can lead to negligent management. Based on the implications of these two issues, the paper points out policy proposals for the reform of the regulation method of the rate-of-return regulation.