1. 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,

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

3. 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.

4. 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”.

5. 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?”

6. 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”.

7. 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.

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

9. Image of “Unbundle”

11. Committee of Electricity System Reform

12. 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.

13. 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

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

15. 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

16. Estimation window of observation
By utilizing market model,

17. Estimation window of ovservation
OLS Estimator : From T0 to T1

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

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

20. 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

21. 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.

22. 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

23. 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

24. CMR, 28th Oct. 2011

25. CMR, 27th Dec. 2011

26. CMR, 2nd April 2013

27. Market Model 28th Oct. 2011

28. Market Model 27th Dec. 2011

29. Market Model 2nd April 2013

30. CAR 28th Oct. 2011

31. CAR 27th Dec. 2011

32. CAR 2nd April 2013

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

34. 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?

35. 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.

36. Thank you for your attention