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
1.
2.
3.
4.
5.
6.
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:
1. To expand the cross-regional coordination of transmission,
2. Fully deregulation of the retail and power generation
sectors,
3. 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:
1. By the first revision on 13th November 2013, the
Organization for Cross-regional Coordination of
Transmission Operators (OCCTO) was established.
2. Entries to electricity retail business were fully liberalized
in the second revision on 11th June 2014.
3. 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:
1. 28th October, 2011: The cabinet decided to set
taskforce about regulatory reform:
2. 27th December, 2011: The taskforce showed the
points at issue.
3. 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:
1. To compare mean return / before and after
2. 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
Rit   i   i Rmt  eit , where Eeit   0 and Vareit    e21
1
 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,
Ri  X i i  ei



where Ri  RiT0 1.............RiTi

X i   Rm  , and  i   i ,  i 
Estimation window of ovservation
 OLS Estimator : From T0 to T1

 i   X i ' X i  X i ' Ri
1
ˆ
eˆi ' eˆi
T1  T0
1
2
ei
eˆi  Ri X iˆi
Varˆ   ( X ' X )
i
i
i
1

2
ei
Estimation of Abnormal Profits
 We set vector of abnormal profit as follows:
*
ˆ
Rit  R   i   i Rm
*
* ˆ
R X 
*
i

 R
i
i
i
R  Ri ,Ti1 1 ...........Ri ,T2
*
i
R
*
m


m ,T1 1 ............Rm ,T2





ˆi  ˆ i , ˆi
Abnormal Profit
 Under null hypothesis, abnormal profit is:
eˆi* ~ N (0, Vi )
 We set CAR as follows:
CAˆ R( 1 , 2 )   ' eˆi* T1   1   2  T2
Var[CAˆ R( 1 , 2 )]   i2 ( 1 , 2 )   'Vi 
CAR: Cumulative Abnormal Return
 Under null hypothesis H0
CAˆ R( 1 , 2 ) ~ N (0,  i2 ( 1 , 2 ))
 Standardized CAR is:
ˆ R( , )
C
A
1
2
ˆ
SCARi ( 1 , 2 ) 
ˆ i
2
2
 If we substitute ˆ i to ˆ ei , 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:
1.
2.
3.
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
28th
Results of Event study , Market
model
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.
Thank you for your attention