Chugoku Electric Power Company Inc. History

Company Perspectives:

The Chugoku Electric Power Co. Inc. seeks to realize inherent potential of energy, rejoices in winning its customers' trust, operates with priority placed on people, contributes to the development of the region, and constantly seeks harmony with nature.

Key Dates:

1948:

The General Headquarters of the Allied Powers creates nine regionally based electricity generation and distribution companies.

1951:

CEPCO incorporates and is given the task of generating and supplying electric power to the entire Chugoku district.

1962:

The company completes the Chugoku-West trunk line and substations.

1973:

The Japanese government begins to enforce electric power conservation during an oil crisis; CEPCO launches a 60 percent rate increase.

1980:

CEPCO is forced to raise its rates by 67 percent due to rising oil prices.

1989:

The firm's second nuclear reactor, Shimane No. 2, begins operation.

1991:

The company launches a new marketing slogan, "EnerGia--With You and With the Earth."

1995:

Japan partially liberalizes its electricity market.

2000:

CEPCO diversifies its holdings as the electricity industry continues to deregulate.

Company History:

The Chugoku Electric Power Company Inc. (CEPCO) generates and supplies electricity to the Chugoku region of Japan, which covers approximately 32,000 square kilometers. The region is made up of the prefectures of Yamaguchi, Hiroshima, Shimane, Tottori, and Okayama, which with local heavy industry and a total population of 7.8 million provides the sixth largest customer base of the ten electric power companies in Japan. The company operates 93 hydroelectric power stations, 12 thermal stations, and one nuclear power station. Plans are in the works to launch several new hydroelectric and coal-fired power stations, and by 2016 the company expects to have its generating capacity balanced equally between nuclear, coal-fired, and other types of facilities. As a result of industry liberalization, CEPCO has diversified its operations and established new divisions including comprehensive energy supply, information and telecommunications, environment, and business and lifestyle support.

Early History: 1945-50s

CEPCO was incorporated along with the other eight regional electric power companies in May 1951, but the story of its foundation goes back to the start of the Allied occupation of Japan in 1945. Japan's energy-intensive, military industrial complex, centered on the production of steel, ships, and munitions, had been destroyed, in large part, at the beginning of the occupation. Although the nuclear bomb dropped on Hiroshima in August 1945 had all but destroyed the main industrial city of the Chugoku region, and enormous damage had been caused by conventional bombing of other industrial sites in the region, Chugoku's electricity-generating facilities had survived the war relatively unscathed. The first year of the Allied occupation saw an energy surplus in the region due to the wartime depletion of industrial demand. This pattern was mirrored throughout the country. As the process of postwar reconstruction gathered pace, however, demand for electricity increased dramatically and soon 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 local distribution companies could be a step in the direction of rearmament. The wartime structure itself had played a key role in Japan's military expansion in the first place. In 1948 GHQ decided to dismantle the centralized JEGTCO structure and replace it with nine regionally based, vertically integrated electricity generation and distribution companies. After a certain amount of disagreement between GHQ and the fledgling Japanese government about the precise structure, status, and organization of the new companies, the government acted to establish the nine electric power companies by implementing the Electricity Utility Industry Reorganization Order and the Public Utilities Order. A tenth electric power company, Okinawa Electric Power, was formed by the Japanese government and the Okinawa Prefecture in 1972 after Japan regained control of the Ryukyu Islands.

On May 1, 1951 operating rights and facilities of the state-run Chugoku branch of the Japan Electricity Generation and Transmission Company and the Chugoku Electric Power Distribution Company were taken over by the newly created Chugoku Electric Power Company. Under government decree, the new company was given the task of generating and supplying electric power to the entire Chugoku district.

While the demand for electricity had already caught up with supply in the late 1940s as a result of rapid reconstruction, the manufacturing economy of Chugoku was given a further boost in the 1950s by the need for components and material support for the war raging on the Korean peninsula. The resulting surge in demand for electricity from local industry stimulated CEPCO to seek the immediate stabilization and expansion of its generating capabilities. The company turned to the United States for technical assistance toward expanding generating capacity through the construction of new coal- and oil-fired thermal power stations.

Growth Fueling Demand: 1960s

By the early 1960s the Japanese economy had entered a period of unprecedented growth, and demand for electricity in Chugoku was increasing by more than 10 percent per year. This need was fueled by industrial demand from the chemicals, metals, steel, shipbuilding, and automobile industries that were growing up along the region's southern coastal corridor. New demand also came from the rapidly expanding small business sector and from private consumers. The latter were beginning to see the fruits of Japan's rapid postwar growth as an increasing number of electric household goods came on the market. The additional electricity necessary for lighting and heating, and in the summer months for air conditioning, contributed substantially to the company's business.

The surge in demand for electric power required the progressive modernization and expansion of CEPCO's electricity generation and transmission facilities. In 1962 the company completed the 81-kilometer, 220,000-volt Chugoku-West trunk line and substations, resulting in a super-high-voltage transmission system linking the Chugoku region with Kansai to the east and Kyushu to the west. By the mid-1960s the annual rate of growth in electricity demand and production was dramatic.

From the early 1960s new generating facilities developed by CEPCO were predominantly thermal plants using imported oil and coal rather than the more traditional hydroelectric power. These included a total of five coal-fired plants commissioned at Mizushima and Shin Ube between 1958 and 1964 and oil-powered facilities opened at Kudamatsu and Iwakuni in 1964 and 1966, respectively. In terms of generating volume, hydroelectric power exceeded that of thermal electric power in 1963, but a decade later the balance had changed to 88 percent thermal, 10 percent hydroelectric, and 2 percent nuclear. This was due not only to the new availability of cheap oil from overseas as an alternative source of energy, but also to technological advancements that had brought the cost of building thermal power stations substantially below that of hydroelectric equivalents.

Oil Crises and Finding Alternative Energy Supplies: 1970s-80s

By 1971, after more than 15 years of uninterrupted growth in demand for electricity in the region accompanied by the continued availability of cheap oil, the first signs of a slowdown in CEPCO's performance began to appear. In that year the Organization of Petroleum Exporting Countries (OPEC) managed to secure the first substantial increase in the price it was charging for oil. This did not cause immediate problems for CEPCO other than necessitating a slight revision of revenue projections, though this was more than offset by continued strong demand from the industrial and domestic sectors. On the expenditure side of the company's finances, rising personnel and repair costs were starting to undermine the company's annual financial performance, though not drastically. The company's investment plans also were influenced by government regulations aimed at reducing atmospheric pollution levels, which required the installation of expensive flue gas scrubbers in thermal power stations. CEPCO responded to these changing and challenging conditions by bringing forward the completion dates for a number of its new power-generating projects. These included the company's first nuclear power plant at Shimane and two oil-burning plants at Tamashima and Iwakuni.

In early 1971, with Kansaku Yamane as president and Kimio Sakurauchi as chairman, CEPCO was anticipating further steady--and by international standards, spectacular--growth in the foreseeable future. The outbreak of war in the Middle East in mid-1973 and the subsequent quadrupling of oil prices by OPEC, however, hit Japan harder than any other country in the Organization for Economic Co-operation and Development (OECD) because of the country's heavy dependence on Middle Eastern oil. The immediate effect on CEPCO was an increase in the price of fuel for its oil-powered thermal generating plants. This resulted in financial difficulties in the short term because the company, like Japan's other electric power companies, was not free to pass on the higher fuel rates to its industrial and domestic consumers without approval from the Ministry of International Trade and Industry (MITI). In December 1973 the Japanese government introduced measures to enforce conservation of electric power, but it was not until later the following year that MITI finally consented to allowing a 60 percent electricity rate increase for CEPCO and the other electric power companies. The first sharp rise in the electricity rate for 20 years, though alleviating short-term financial pressures on the industry as a whole, failed to ultimately benefit the power companies because the price of oil continued to rise. Furthermore, as higher charges were passed on to the large energy-intensive manufacturing sector, output fell, inflation rose, and the economy moved into its first real postwar recession.

The oil price hikes that continued throughout the 1970s stimulated a major reappraisal of Japan's resource security. Even though individual power and oil companies were able to meet their requirements for oil by paying inflated prices at spot markets around the world, it soon became apparent that Japan needed to diversify its supply of energy away from the Middle East and its oil. Although a number of projects had been in the planning phase for some time, the events of 1973-74 added urgency to strategic decision-making in Tokyo and at CEPCO's head office in Hiroshima.

The commissioning in 1974 of the Shimane Boiling Water Reactor (BWR) as CEPCO's first nuclear power unit, with a capacity of 460 megawatts, contributed substantially to oil-saving measures. In 1976 the diversification policy was pursued actively through a large financial commitment toward construction of the 620-megawatt pumped-storage-type hydroelectric power complex at Nabara. Both local and national economies were recovering by 1976 and CEPCO's sales for that year increased by 21 percent over the previous year.

In spite of the strenuous efforts made by CEPCO after the first oil shock in 1973-74, by the time of the second oil crisis, following the Iranian revolution in 1979, CEPCO was still heavily dependent on imported oil for electricity generation. Its vulnerability to rising oil prices was such that in 1980 CEPCO was forced to raise its rates again, this time by 67 percent, the highest rate rise of the nine other electric power companies. In the same year, in order to accelerate the diversification policy, it was decided that three existing oil-burning power stations at Shin Ube would be converted to coal power.

In 1981 CEPCO was still dependent on oil for 52 percent of its generating capacity, the highest dependency of the nine electric power companies. To reduce further the destabilizing effects of this dependency, in 1980 plans were launched by CEPCO to import coal from China and Australia, and since 1989 liquefied natural gas has been imported from Australia.

The Three Mile Island nuclear accident in the United States in 1979 led to a suspension of nuclear plant construction plans in Japan for one year, and resulted in a general distrust of all nuclear-related matters by the Japanese population, especially in the Hiroshima region. Nevertheless, the building of Shimane No. 2 started in July 1984. The plant began operations less than five years later, in February 1989, adding a further 820 megawatts of capacity to the existing output of 460 megawatts from the Shimane No. 1 reactor. Also in 1989, plans were completed to build a third nuclear reactor in Yamaguchi Prefecture to provide electric power for the early 21st century.

Liberalization Bringing Changes: 1990s and Beyond

In 1991 CEPCO's chairman, Kenichiro Matsutani, headed a company with a much-reduced dependency on imported oil and a generating capacity well diversified between imported LNG, coal, and oil, and locally produced hydroelectric and nuclear power. As the leader of the Chugoku business community, with a regional monopoly in the supply and distribution of electricity to domestic and industrial customers, CEPCO was now better prepared for fluctuations in the price of energy resources and demand for electricity than it had been for many years.

In fact, during fiscal 1990 the company reported an increase in sales and profits for the first time in five years. The good fortune continued into the following year, as after-tax profit climbed by 42.1 percent. During 1991, the company adopted a new environmentally friendly corporate philosophy. Its key concept included the marketing tag, "EnerGia--With You and With the Earth."

Meanwhile, Japan's electricity sector was beginning to change. During 1995, the Japanese government partially liberalized the industry, allowing independent power producers (IPPs) to sell electric power to the regional companies. Then in March 2000, these IPPs were allowed to market directly to customers, allowing both foreign and domestic competition in the retail electricity market.

In response to the liberalization, CEPCO began to restructure its operations to prepare for the increased competition. Three new divisions were established--Energy and Marketing Services, Power Generation, and Power System. Like the other regional power companies, the firm began to cut costs and lower prices. A November 2000 Financial Times article claimed that Japan's electric power concerns were also "busily building up alternative sources of income, focusing mainly on telecommunications and activities on the fringe of their core businesses, following the example set by power companies in the deregulated markets of Europe and the U.S."

Indeed, CEPCO entered several new markets during 2000 and 2001, including energy supply, information and telecommunications, environment, and business and lifestyle support. Energia Solution & Service Company Inc. (ESS) was established as an energy supply venture in October 2001. Mizushima LNG Company Ltd., Mizushima LNG Sales Company Ltd., and Power Engineering and Training Services Inc. also were created. In early 2002, Chugoku Information System Service Co. began offering a fixed-rate Internet connection service and EnerGia Real Estate Co. Inc. was launched.

CEPCO also expanded its core business. It had plans in motion to open several new hydroelectric and coal-fired thermal power stations and in 2000 the firm was given permission to develop the Shimane Nuclear Power Station No. 3 Unit. Construction was slated to begin in March 2003.

During this time period, Japan's economy was faltering. Demand from steel and manufacturing sectors fell, and in fiscal 2002, electricity sales fell for the first time in 15 years. Overall, company revenue fell by 2.3 percent over 2001. The firm's major cost-cutting and streamlining efforts paid off, however, and net income rose to $349.4 million--an increase of 70.8 percent over the previous year.

In order to survive in its new competitive environment, CEPCO management remained focused on strengthening its core business and developing lucrative new ventures. The company also strove to maintain a healthy corporate image and targeted environmental preservation and research and development as key points in its management philosophy. Although Japan's electricity industry was certain to experience additional change, CEPCO appeared to be on track for future success.

Principal Subsidiaries: Chuden Kogyo Co. Ltd.; Chuden Plant Co. Ltd.; Chugoku Instruments Co. Inc.; Chugoku Kigyo Co. Inc.; Chugoku Electric Mfg. Co. Ltd.; Chuden Kankyo Technos Co. Ltd.; Chugoku Information System Service Co. Inc.; Ozuki Steel Industries Co. Ltd. (80%); Chuden Engineering Consultants Co. Ltd. (80%); The Chuden Access Company Inc. (80%); Chuden Life Co. Ltd. (76.4%); Tempearl Industrial Co. Ltd. (56%); Sanko Inc. (46.7%); Fukuyama Joint Thermal Power Co. Ltd. (50%); Mizushima Joint Thermal Power Co. Ltd. (50%); Chudenko Corporation (37.4%); Chugoku Telecommunication Network Co. Inc. (34.4%); Chugoku Koatsu Concrete Industries Co. Ltd. (33.3%); EAML Engineering Company Ltd. (18%); Chuden Business Service Co. Inc.; EnerGia Real Estate Co. Inc.; Power Engineering and Training Services Inc. (80%); International Standard Management Center Inc. (66%); Energia Solution & Service Company Inc. (53%); Chugoku Health and Welfare Club Co. Inc. (50%); Mizushima LNG Company Ltd. (50%); Mizushima LNG Sales Company Ltd. (40%); Houseplus Chugoku Housing Warranty Corporation Ltd. (35.6%).

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

Further Reading:

• "Chugoku Electric Power Boosts Sales, Profits," Jiji Press Ticker Service, May 28, 1991.
• "Chugoku Electric Power Lifts Sales, Profit," Jiji Press Ticker Service, May 27, 1992.
• "Chugoku Electric Power's Profit Sags," Jiji Press Ticker Service, May 27, 1996.
• "Chugoku Enjoys Higher Earnings," Jiji Press Ticker Service, May 26, 1995.
• Davis, Paul, Anne Hung, and Hideo Ohta Baker & McKensie, "Liberalization of Japanese Electricity Industry," Power Economics, May 31, 2000, p. 18.
• "Deregulation Opens Power Market," Nikkei Weekly, April 24, 1995, p. 10.
• Fukuda, Takehiro, "Electric Power Industry Posts Profit," Nikkei Weekly, December 14, 1991.
• History of Electric Power Industry in Japan, Tokyo: Japan Electric Power Information Centre, 1988.
• Hutton, Bethan, "Japan's Electricity Producers Profit from Liberalization," Financial Times London, November 23, 2000, p. 16.
• "Japanese Govt. Panel Clears Construction of Nuclear Reactor," AsiaPulse News, August 22, 2000.
• Thomas, Steve, and Chris Cragg, Japan Power Station Fuel Demand to 2000, London: Financial Times Business Information, 1986.

Source: International Directory of Company Histories, Vol. 53. St. James Press, 2003.