REGULATORY REFORM IN THE JAPANESE ELECTRIC POWER INDUSTRY AN EVENT STUDY ANALYSIS IAEE 2017 Conference , Singapore 20th June 2017 Koichiro Tezuka, Nihon University, Masahiro Ishii, Sophia University, Satoru Hashimoto, Teikyo University,

Agenda Introduction Regulatory reform in the Electricity sector in Japan Event Study Analysis Data and Methodology Results and Interpretations Conclusion and Future Research

1. Introduction In this study, we observe the effects of the recent regulatory reform on the electricity industry in Japan. After 11th March, 2011 of “Fukushima”, the government and METI(Ministry of Economy, Trade, and Industry) changed the electricity system drastically. To see this, we apply an event study analysis to the industry.

1. Introduction The problems are: When the regulatory reform was substantially decided? Complicated policy making process Difficult to identify the timing When the stock “market” recognized the reform? 1st regulatory reform passed Parliament on 13 Nov. 2013 Cabinet ministers’ decision on 2nd April 2012 These two had been already factored into the “market”.

1. Introduction In this study, By utilizing an event study analysis, we try to identify the time when “market” recognized the reform. By utilizing the results, we also provide interpretations from the results. “when the regulatory reform substantially decided?”

2. Regulatory reform in the electricity sector in Japan After Fukushima, The government provided the guideline about the Electricity System Reform on 2nd April, 2013. The guideline consists of three parts: To expand the cross-regional coordination of transmission, Fully deregulation of the retail and power generation sectors, Legal separation of power generation and transmission/distribution So called “unbundling”.

2. Regulatory reform in the electricity sector in Japan After the guideline was announced, the Electricity Business Act has revised for 3 steps: By the first revision on 13th November 2013, the Organization for Cross-regional Coordination of Transmission Operators (OCCTO) was established. Entries to electricity retail business were fully liberalized in the second revision on 11th June 2014. As the third step, it was decided on 17th June 2015 that the transmission/distribution sector will be unbundled legally on 1st April 2020.

Electricity companies in Japan Source METI Each EPCO vertically operates power generation, transmission/distribution, and retail.

Image of “Unbundle”

Committee of Electricity System Reform

2. Regulatory reform in the Electricity sector in Japan Regarding the problem “when unbundle was subtantilly decided?”, we picked up three events before the final decision of the reform: 28th October, 2011: The cabinet decided to set taskforce about regulatory reform: 27th December, 2011: The taskforce showed the points at issue. 2nd April, 2013: The cabinet decided to carry out the reform.

3. Event Study Analysis Event study analysis To observe reactions of the market for events Two Main Approaches: To compare mean return / before and after To calculate CAR(Cumulative Abnormal Return) Models for measuring :Mackinlay (1997) Constant Mean Return Model Market Model others

Models for Measuring Cumulative Abnormal Return Constant Mean Return Model Market Model Rmt denotes rate of return for market portfolio.

Market model/ Estimation of CAR Estimation window: from T0 to T1 Before the event occur Event window　τ: from T1 to T2 In this study we use T1=-10, T2=10 (20 days) Post event window　（from T2 to T3） Estimation of Cumulative Abnormal Return

Estimation window of observation By utilizing market model,

Estimation window of ovservation OLS Estimator : From T0 to T1

Estimation of Abnormal Profits We set vector of abnormal profit as follows:

Abnormal Profit We set CAR as follows: Under null hypothesis, abnormal profit is: 　　　　　　　 We set CAR as follows:

CAR: Cumulative Abnormal Return Under null hypothesis H0 Standardized CAR is: If we substitute to , then distribution of SCAR follows t-statistic with degree of freedom L1-2

4. Data and Methodology Data description We employ 10 EPCOs and 3 Gas Companies. Listed with Tokyo Stock Exchange As proxy variable of market portfolio, TOPIX and NIKKEI225 are employed. Data source : NIKKE NEEDS Financial Quests. Sample Period: 1st April 2011 – 16th April 2013 We use only business days.

Event Study We use Constant Mean Return model and Market model. We employ three event dates as mentioned: 28th October, 2011: The cabinet decided to set taskforce about regulatory reform: 27th December, 2011: The taskforce showed the points at issue. 2nd April, 2013: The cabinet decided to carry out the reform Estimation window : 6 month To avoid the day of 11th March 2011. Event window: 10 business days before/after the event That is from -10 to 10 Post event window: 1 month

4. Results and Interpretations The results are following slides: 28th Oct. 2011, 27th Dec. 2011, and 2nd April 2013 Constant Mean Return model Market model

CMR, 28th Oct. 2011

CMR, 27th Dec. 2011

CMR, 2nd April 2013

Market Model 28th Oct. 2011

Market Model 27th Dec. 2011

Market Model 2nd April 2013

CAR 28th Oct. 2011

CAR 27th Dec. 2011

CAR 2nd April 2013

Results of Event study , Market model 28th Oct 2011 27th Dec 2011 2nd April 2013

5. Conclusions and Future Research From the results, all null hypothesis could not be rejected. So we could not find the effects of (three) events on stock prices and their return. Except for CMR, 2nd April 2013 It may be considered that the stock market had already allowed for the regulatory reform. If that is the case, when the stock market convinced the implementation of the reform? Before? After?

5. Conclusions and Future Research While policy making processes in Japan seem to be gradual, in this case the decision regarding electricity system reform seems to be fast. However, it is difficult to specify the date when the implementation of the reform was substantially decided. In this study, we could not find the date. To find this, we will investigate the circumstances in more detail, and apply more event days for our future research.

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