Hokkaido Electric Power Company Inc. (Hepco) Business Information, Profile, and History

Company Perspectives:

In the months and years ahead, Hokkaido Electric will maximize efforts to maintain a stable and affordable supply of high-quality electricity while striving for greater business development with the aim of providing our customers and shareholders with the level of service they expect.

History of Hokkaido Electric Power Company Inc. (Hepco)

Hokkaido Electric Power Company Inc. (HEPCO) operates as one of Japan's ten regional power companies supplying electricity to over 3.8 million customers on the island of Hokkaido. The company has traditionally relied on hydroelectric and coal-fired power but shifted its generation focus to nuclear power in the 1990s. Japan partially deregulated its retail electric power sector in March 2000, leaving HEPCO's market open to competition. As such, the company is focused on strengthening its core operations while branching out into energy services.

Origins

While HEPCO was incorporated along with eight other regional Electric Power Companies (EPCs) in May 1951, the history of its foundation goes back to the beginning of the Allied occupation of Japan in 1945. Japan's energy-intensive munitions industry had been eliminated by the start of the occupation, leading immediately to an electricity surplus in the first year of occupation. As the process of reconstruction gathered momentum, demand soon caught up with and exceeded supply. The General Headquarters of the Allied Powers (GHQ) feared that an expansion of electricity production under the surviving and highly centralized wartime structure of the Japan Electricity Generation and Transmission Company (JEGTCO) and the nine distribution companies could be a step in the direction of rearmament. In 1948, it was decided by GHQ to dismantle the JEGTCO structure and replace it with nine regionally based and vertically integrated electricity generation and distribution companies. After a number of disagreements between GHQ and the government of Japan about the precise structure, status, and organization of the new companies, the government acted to establish the nine EPCs by implementing the Electricity Utility Industry Reorganization Order and the Public Utilities Order.

Until the end of April 1951, generation and distribution of electricity in Hokkaido had been the responsibility of the centrally controlled Hokkaido branch of the Nippon Hasso Electric Company Ltd. (NHEC) and the locally based and only semi-autonomous Hokkaido Haiden Company Ltd. (HHC). On May 1, 1951, following the promulgation of the Public Utilities Order, the two companies were merged and the independent Hokkaido Electric Power Co. Inc. (HEPCO) was established to manage the generation and supply of electric power in Hokkaido. At that time, capitalization of HEPCO was £330 million and generating capacity 312,000MW (megawatts).

Postwar Demand Leads to Development of New Power Sources

The early 1950s saw electricity demand increase rapidly throughout Japan as the process of economic and industrial regeneration got under way. In Hokkaido, as in other parts of Japan, demand for electricity in this period of growth exceeded supply, and HEPCO was forced to restrict electric power consumption. Supplies were also affected by industrial action taken by members of the Council of All Japan Electric Workers Union from September to December 1952. The widespread and disruptive blackouts, which were particularly unsettling for industry during these early years, were finally outlawed in 1953 by the Law for the Regulation of Strike Activity in the Electric Utility and Coal Industries. The company actively developed hydroelectric and coal power sources to expand its generating capacity further in the face of the immediate problems. As a result, HEPCO was able to remove restrictions on supply in 1953.

As Japan entered the prolonged period of rapid economic growth, industrial output and living standards rose. Demand for electricity from industry and from private consumers expanded by an average of 10 percent per annum throughout Japan as a whole, and to meet this demand locally HEPCO had to develop further power sources. For hydroelectric power (HEP) resources, HEPCO promoted the Hidaka Development of Power Resources scheme. This led to the construction of the 13,500 kilowatt (kW) Iwachishi Power Station, and in 1963 HEPCO completed the 44,000kW Okunikappu Power Station, the first "Arch-Dam" type--a concrete structure across a valley which is arch-shaped and faces up the valley, when seen in plan--to be built in Hokkaido.

In the field of thermoelectric resources, following the governmental policy of protection and promotion of coal mining industrial areas, HEPCO promoted the construction of coal-powered generating stations Takigawa Power Station (225,000kW) and Ebetsu Power Station (375,000kW). In 1962, HEPCO thermal electric generation capacity overtook its HEP generating capacity for the first time, and in 1964 total electricity generation broke through the one million kilowatt barrier for the first time.

Although the nine EPCs had been established at the same time from the components of the previously centralized JEGTCO, HEPCO had always remained a "semi-detached" part of the Japanese electricity generating industry--even before 1965, there were no transmission links between HEPCO and the rest of Japan, while the other EPCs traded electricity between their areas of supply. This detachment became more apparent when in October 1965 the 300MW Sakuma Frequency Converter Station started operations in central Honshu, Japan's main island, effectively connecting the 50 Herz and 60 Herz systems used in Japan. As a result, the other eight EPCs were connected up into a national grid, while Hokkaido remained on the outside.

Battling the Oil Crisis

The year 1973 was the 100th anniversary of the Hokkaido government. This was heralded by the Winter Olympics held in 1972 in and around Sapporo and by the completion of the Sapporo underground railway system and underground shopping center. HEPCO had been actively involved in supporting these projects as they represented a boost to demand for electric power and provided a useful showcase for HEPCO's involvement in Hokkaido's rapid reconstruction and development. By the end of the year, however, HEPCO's fourth president, Iwamoto Tsunetsugu, found himself in charge of a company that was about to receive the biggest shock of its short history.

The outbreak of war in the Middle East in 1973 and subsequent quadrupling of the crude oil price imposed by the Organization of Petroleum Exporting Countries (OPEC) affected Japan more than most industrially advanced countries for the reason that Japan received about 70 percent of its oil from the region. The Japanese EPCs were hit in two ways by the oil crisis and its aftermath. First, the price of oil for oil-powered thermal power stations skyrocketed, adversely affecting the companies' daily financial position. Second, in the longer term, higher energy costs stimulated a dramatic restructuring of Japan's economy away from energy-intensive industry. HEPCO's ability to deal with these changes in conditions was greater than the other EPCs because imported oil accounted for only a small fraction of its electricity-generating capacity, while HEP and locally mined coal provided the utility with secure energy sources. Nevertheless, such was the impact of the oil price rise on the company's oil-powered thermal power stations that in April 1974 HEPCO sought government approval for a 48 percent raise in charges. This was in fact the lowest raise of those requested by the nine EPCs.

As a result of the oil shocks, electricity rates throughout Japan were raised on a number of occasions, and in 1981 HEPCO raised its rates once again, thereby becoming the most expensive electricity supplier in Japan, a fact that indicated the company's poor financial structure. The company's deteriorating financial position could not be blamed entirely on international pressures. The late 1970s had witnessed further OPEC price rises, the second oil crisis following the Iranian revolution, economic stagnation throughout Japan, and a dramatic depreciation of the value of the yen against the dollar. The other eight EPCs had weathered the storm after suffering their worst losses in financial year 1979-1980. For the eight, salvation came in the form of an agreement from the Ministry of International Trade and Industry (MITI) to allow the companies to raise their electricity rates by an average of 50 percent which, combined with windfall profits from currency fluctuations and a fall in demand for expensive oil-generated electricity, led to a spectacular recovery the following year. HEPCO, on the other hand, had been offered a lower rate increase by MITI because at the time it was considered to be less dependent on imported oil. Unfortunately, the price of locally produced coal was also escalating, but because of a long-term commitment on the part of MITI to promote the development of Japan's domestic coal reserves, HEPCO had not been in a position to develop oil, as the cheap and flexible power source, to anything like the degree of the other EPCs. HEPCO thus suffered the consequences of its own close relationship with the local coal industry until the company was able to develop a more diverse electricity-generating capacity.

HEPCO Expands Its Generating Capacity in the 1980s

Regarding development of new power resources, HEPCO started construction of the crude oil-powered thermoelectric Date Power Station (700,000kW) in 1979 and announced the selection of the site for the Tomari Power Station, which was to be Hokkaido's first nuclear plant. In 1980, Date Power Station was completed, as was the construction of Tomatoatsuma Power Station (960,000kW) which was the first facility designed to use imported coal. In the nuclear sector, construction eventually started on the Tomari Power Station (1,158,000kW), progress on which had been suspended for one year in the wake of the Three Mile Island nuclear accident in the United States.

The demand for electricity did not increase in the latter half of this period, though it could be recognized as an era in which the "best mix" of resources was promoted between hydroelectric power, oil, coal, and nuclear-powered electricity generation under the company's fifth president, Yotsuyanagi Takashige. In order to stimulate demand for electricity in the region, HEPCO embarked upon a variety of public relations and electricity promotion schemes, and in January 1988 HEPCO cut its electricity rates. This was beneficial to local consumers but resulted in a steep drop in profits the following year.

In March 1989, HEPCO's first nuclear facility, its 579MW Tomari No. 1 generating plant, began full-power testing. In June of the same year, it went into commercial operation. Tomari No. 2 Nuclear Power Plant started operations in April 1991. Together, the nuclear generating plants became HEPCO's largest generation facilities. HEPCO lagged behind the other EPCs in diversifying generating capacity, but generating costs were expected to fall as the current phase of nuclear power development was completed.

HEPCO instituted a number of measures in the late 1980s and early 1990s to lower the cost of producing electricity at coal-fired power stations. It aimed to reduce reliance on higher priced domestic coal as part of the diversification strategy. At Tomatoatsuma No. 2, HECPO was using low-cost coal imported from Australia and Canada. The interim aim was to reduce the coal content of the total electricity-generation equation from 64.1 percent in 1988 to about 29.3 percent by 1993.

Faced with structural disadvantages in the provision of electricity in Hokkaido, namely higher generating and transmission costs than in other parts of Japan, HEPCO was keen to diversify its activities. Following the start of the liberalizing of Japan's telecommunications business in 1985, the company paid great attention to opportunities within the telecommunications market. Telecommunications was identified as a potential market because the company had already obtained a wealth of experience in developing and maintaining an expansive electricity-transmission network. It was felt that this experience, combined with the latest technological innovations, would enable the company to run a parallel telecommunications network to challenge the Nippon Telegraph and Telephone Corporation (NTT) monopoly. In October 1987, HEPCO became involved in setting up Hokkaido Telemessage Inc. to market paging systems. In July 1988, together with Daini Denden, it set up Hokkaido Cellular Telephone Co. to market automobile telephones, and in April 1989, in conjunction with Mitsui Co. and Mitsubishi Co., it established Hokkaido Telecommunications Network Co. Inc. This new company used a portion of the optical fiber cable system installed by HEPCO to provide low-cost data transmission and specialized telephone services.

By this time, the company had successfully introduced a number of new technologies and products developed specifically for the climate of Hokkaido, which was characterized by cold winters and abundant snowfall. These products included a range of electric heaters which incorporated heat storage devices utilizing cheap offpeak electricity. The company also developed new snow melting equipment.

As part of the company effort to promote the use of electricity, HEPCO constructed an experimental, all-electric cold weather research house in 1988. Similarly, with an eye to the local agricultural producer, HEPCO was conducting research, in an experimental greenhouse, into the possibility of growing vegetables in cold climates. In line with strict national regulations on emissions of pollutants from power stations, work had been carried out on a new system of dry desulfurization using coal ash. The results of this work were expected to be incorporated in the huge Tomatoatsuma No. 1 coal fired generating plant.

In spite of these encouraging developments, HEPCO was still faced with a number of longer-term structural problems which needed to be resolved. Dependency on expensive local coal was still high in relation to the other EPCs, and full diversification into oil, nuclear power, and imported coal had yet to be achieved. Nevertheless, as sole supplier of electricity to Hokkaido, HEPCO's operational base appeared to be stable.

Facing Deregulation: 1990s and Beyond

That would soon change, however, as deregulation began to take place. In the 1990s, the electricity industry in Japan was undergoing a transformation. In 1995, changes in the Electricity Utilities Industry Law allowed competition to enter into the electricity generation and supply market. Then, in 1996, a wholesale electric power bidding system enabled non-electric power companies to sell electricity to power companies. Finally, in March 2000, the retail sale of electricity was partially deregulated, allowing large-lot customers--those demanding large amounts of electricity--to choose their power supplier.

The goal of deregulation was to foster competition which, in turn, would lower electricity costs. The deregulation was slow to change the Japanese industry, and during 2001 Hokkaido and the nine other regional companies still controlled 99 percent of the market. In fact, only six Japanese-based companies--other than the original ten--supplied power to large customers, including retail stores and office buildings. This accounted for a .2 percent share of the overall market.

Nevertheless, Hokkaido remained focused on strengthening its core operations while branching out into new energy-related services in order to prepare for increased competition. The company bolstered its nuclear power capabilities in the 1990s, which allowed it to pass along rate cuts to its customers. The move to nuclear power, however, proved to be a hot topic of debate among Japan's residents, who filed lawsuits against HEPCO and other companies with nuclear plants, claiming the facilities were environmentally unfriendly and potentially dangerous. Sure enough, an accident at a nuclear power facility in Tokaimura, Ibaraki Prefecture, in 1999 brought most nuclear expansion plans in Japan to a halt.

According to a March 2000 Business Week article, nuclear power accounted for nearly 35 percent of Japan's electricity. For much of the 1990s, Japan's industry had aggressively focused on shifting from expensive and polluting coal-fired plants to nuclear power. Due to rising concern over the safety of these nuclear facilities, Japan's government was forced to rethink its expansion efforts, cut back on its nuclear development plans, and find alternative sources of power.

While HEPCO gained approval for a third reactor at Tomari in 2003, the company did branch out into alternative energy. In 1999, the firm began purchasing electricity from Tomen Corp., a trading company that generating wind-power from wind turbines in Tomamae, Hokkaido. In October 2002, HEPCO launched another round of price cuts, lowering electricity rates by nearly 5 percent.

The promise of continued deregulation in the new century and the need to focus on environmentally friendly power forced HEPCO to restructure certain operations as a means of cutting costs and gaining efficiency. The firm continued to expand into new areas and created Energy Frontier Co. Inc., a comprehensive energy services unit, in November 2000. It also developed its chemical and biology-related holdings and remained dedicated to working in the cutting-edge field of glycotechnology. As the company branched out into new business ventures, HEPCO's focus on providing Hokkaido residents with reliable, low-cost power remained at the forefront of the company's strategy.

Principal Operating Units: Hokkai Electrical Construction; Hokuden Kogyo; Hokkaido Power Engineering; Tomato Coal Center; Hokkaido Electric Meters Industry; Hokuden Sogo Sekkei; Hokkaido Yochi; Hokkai Hydro Generation; Hokuden Eihai Engineering; Hokuden Life System; Chemical Biology Institute; Hokuden Sports Fields; Hokkaido Telecommunications Network; Hokuden Information Technology; Energy Frontier; Hokkaido Records Management.

Principal Competitors: Chubu Electric Power Company Inc.; Kansai Electric Power Company Inc.; Tokyo Electric Power Company Inc.

Chronology

• Key Dates:
• 1948: The General Headquarters of the Allied Powers decides to dismantle the Japan Electricity Generation and Transmission Company.
• 1951: HEPCO is established to manage the generation and supply of electric power in Hokkaido.
• 1963: The Okunikappu Power Station goes online.
• 1973: Japanese electric companies begin to suffer due do the Middle East oil crisis.
• 1989: The company's first nuclear facility begins commercial operation.
• 1991: A second reactor is established.
• 1995: Deregulation begins in Japan's electricity sector.
• 2000: The retail sale of electricity is partially deregulated.
• 2003: HEPCO receives approval for its third reactor.