Government considering plan to dismantle TEPCO

A secret plan to dismantle Tokyo Electric Power Co. (TEPCO), the operator of the crippled Fukushima No. 1 nuclear power plant, is circulating within the government.

The proposal, which is associated with a faction of bureaucrats who have long supported liberalization of Japan's power industry, envisages the passing of a special measures law that would put the company under close government supervision before eventually bankrupting it and completely restructuring its remnants.

There are also proposals to smash the company's powerful influence on politicians and the mass media and force executives to give all their pay and severance settlements to victims of the earthquake.

However, a rival faction in the Ministry of Economy, Trade and Industry and the Agency for Natural Resources and Energy (ANRE) and politicians with links to the power industry may try to fight or emasculate the radical proposals.

Sources said internal government discussions about how to handle TEPCO began in earnest around March 28, as it became clear that trillions of yen would be required just to compensate residents of Fukushima Prefecture affected by the nuclear disaster. The plan to dismantle the firm was being circulated by the end of the month.

At its center is a special measures bill placing TEPCO under government supervision and paving the way to pulling it apart.

A former ANRE official who supports the plan said: "The special measures law will be necessary when we consider the need for comprehensive reform of TEPCO's management, including the establishment of a third-party organ to certify compensation decisions, a way to come up with the funds to pay compensation, and the separation of the company's nuclear energy department."

According to an outline draft proposal, there would be four main measures within the bill.

An independent committee would be established within the government to oversee TEPCO's management. It would monitor the selection of executives, the compensation process and management reform.

The law would allow the government to guarantee all loans from financial institutions needed to pay for the disaster response at the Fukushima No. 1 nuclear power plant.

Business transactions, such as payments for fuel, would also be protected.

Finally, the law would put a moratorium on the repayment of debt, including corporate bonds, from before the March 11 earthquake and tsunami.

A key issue in handling the issue will be timing. If the government uses public funds to save the company before the compensation to be paid out is decided, the burden on the public is likely to be increased.

Even if the central government injects capital into TEPCO in exchange for preferred stock, that stock would have a subordinate claim to the assets of the company compared with debt held by financial institutions and corporate bonds. Its claims would be the first to be pushed aside in bankruptcy proceedings.

A government official said it would be folly to "inject fresh water into polluted water, because that water would end up becoming polluted as well."

Instead, supporters of the restructuring plan want to keep TEPCO in its current form in the short term and use government guarantees to keep it running.

Those guarantees would not extend to financial claims dating from before the finalization of the government bailout plan, including approximately 2 trillion yen ($23.6 billion) in emergency loans recently extended by major financial institutions.

A government source said those loans had been "something the private sector did based on its own risk assessments."

The plan expects bankruptcy proceedings to begin once the amount of compensation is settled and the total cost of handling the Fukushima accident can be estimated.

According to the company's financial statements for the fiscal year ending in March 2010, TEPCO had 13.2 trillion yen in assets and 10.6 trillion yen in liabilities. If compensation exceeds the difference between those amounts, TEPCO would have excess liabilities. Some estimates put the cost of compensation and handling the Fukushima accident at approximately 10 trillion yen, meaning TEPCO is already effectively bankrupt.

The plan envisages a drastic restructuring of TEPCO during the bankruptcy and rehabilitation process.

During the bankruptcy proceedings, a financial dissolution plan would be compiled after most of the debt was finalized. That plan would likely include eliminating all the company's capital and asking financial institutions to forgive debt.

To lessen the impact on the corporate bond market, the discounting of bonds would likely be less severe than the writing off of debt from financial institutions.

The biggest issue at the rehabilitation stage is likely to be a proposal supported by some METI officials to separate the power generation and power transmission arms of TEPCO.

When Britain privatized its electricity generation industry, it was separated into two distinct sectors: companies handling power generation and firms responsible for power transmission. The aim was to keep down the price of electricity by encouraging competition in the industry.

In Japan, all nine electric power companies handle both power generation and transmission, and they have been fighting the idea of separating the two functions for years.

Under the plan, TEPCO would first be made a holding company and subsidiaries would be established to separately handle power generation and power transmission. Conventional thermal and hydro power plants owned by the power generating arm would be gradually sold off to new entrants to the market. Selling off plants and profitable subsidiaries would lessen the financial burden on the public.

Eventually, TEPCO would end up as a power transmission company on a far smaller scale than it is at present.

Sources said separation into power generation and transmission companies would probably happen two or three years after passage of the special measures law.

There are also proposals for a ban on political donations by TEPCO and its labor union. The power industry is known for its strong political connections, with key backers including Lower House member Akira Amari and other Liberal Democratic Party members, who make up the commerce lobby, and Upper House Democratic Party of Japan member Masashi Fujiwara, who has roots in the Federation of Electric Power Related Industry Worker's Unions.

Another issue that may be addressed is TEPCO's influence over the mass media, maintained using a huge advertising budget, which was used to foster the widespread belief that nuclear plants did not pose a safety risk.

There are also proposals to force all TEPCO executives to donate all of their remuneration and severance pay to victims of the nuclear accident, to cut corporate adviser posts, and to prevent retiring executives from getting jobs at related companies, a practice known as "amakudari."

The fate of the plans may partly rely on bureaucratic politics, and, specifically, the relative influence of two rival bureaucratic factions within METI and ANRE.

Around 2004, when Katsusada Hirose and Seiji Murata were METI vice ministers, a group arguing for liberalization of the electric power industry was in the ascendancy. But bureaucrats defending the status quo, under the patronage of Hideji Sugiyama and Takao Kitabata, who later served as vice ministers, have made a comeback and now hold a number of important ministry posts. The plan to dismantle TEPCO is associated with the liberalizing group.

One high-ranking ANRE official emphasized that the plan had not yet been authorized, and a mid-level METI bureaucrat said, "It is only being talked about by those in the Prime Minister's Official Residence and the National Policy Unit."

There is a strong possibility that the plan will be watered down by politicians in the Diet or emasculated by officials in METI and ANRE, which has been chosen as the lead agency overseeing the future of TEPCO.