Wall Street Journal Stating the Obvious: "Tepco and the government were made for each other..."

Just like Chisso (of Minamata mercury poisoning fame) and the government were meant for each other, I suppose, with taxpayers footing the bill. Nothing new.

From Wall Street Journal (2/16/2012):

Reading Austen in Tokyo
Tepco and the government were made for each other, if only they would admit it.

By Joseph Sternberg

An Internet wit offers a facetious summary of Jane Austen's collected works: "Female Lead: 'I secretly love Male Lead. He must never know.' Male Lead: 'I secretly love Female Lead. She must never know.' They find out." While perhaps not entirely accurate with regard to Austen's novels, it does describe the comedy of manners now unfolding between the Japanese government and Tokyo Electric Power Company, or Tepco.

Nearly a year after an earthquake and tsunami devastated eastern Japan, Tepco is still shaking. Saddled by astronomical costs for clean-up and compensation related to the tsunami-induced disaster at its Fukushima Daiichi nuclear power plant, the company is fighting the government over the terms of a bailout. The government insists on a majority voting share for taxpayers—an effective nationalization—and some officials have even hinted darkly at the prospect of breaking up the vertically integrated utility. Tepco is resisting any dilution of existing owners while trying to hike commercial power rates.

That both sides are making this look like a genuine feud is enough to raise suspicions in a land where subtlety and indirect speech are the norm. Sure enough, there are good reasons to think that despite the conflict, this Jane and Mr. Bingley will end up living happily ever after together by the time the last chapter is written.

Tepco's calculation is simple: It needs the cash. The government is offering 1 trillion yen ($13 billion) in ready money with which the utility can meet demands for nuclear-related compensation, fully shut down the stricken Fukushima plant, and pay for the more expensive fossil fuels it's burning now that its former generation mainstay, nuclear, has fallen into ill repute. Tepco recently announced it lost 623 billion yen from April to December 2011.

The utility also can make a cogent argument that government money need not come with managerial strings attached. The taxpayer cash injection would amount to an insurance pay-out. There has been a lot of talk over the past 11 months about pre-tsunami management failures and safety lapses at Tepco. Lost in the shuffle is the fact that whatever its inability to plan for or respond to a once-in-a-hundred-lifetimes natural disaster, the company under normal circumstances would have functioned quite happily indefinitely had Mother Nature not intervened.

That makes Tepco different from the case of Resona Bank, a financial institution Tokyo bailed out in 2003 in exchange for management control. Yukio Edano, the trade minister and government point man on Tepco, now says Tokyo views Resona as a model for how to do intervention. In that case, a long string of management failures on matters such as lending standards prompted government to step in. But there is a less obvious argument that Tepco needs better, government-imposed management to . . . do what, exactly? Stop the next earthquake?

Note that the government's interests align neatly with Tepco's, despite Mr. Edano's strong statements to the contrary. Since honest socialism—paying compensation directly from the government purse—seems to be off the table, Tokyo's chief goal is to preserve Tepco as a going concern capable of "paying back" over time taxpayer money used for accident payouts today. Yet while it may be impossible to save the utility without taxpayer cash, it likely would be equally impossible to rescue it with the kind of government control Mr. Edano purports to want.

Consider rates. The rate of increase in electricity consumption has been fairly low over the past decade (and sometimes negative), and is likely to remain so for as long as the overall Japanese economy stagnates. That leaves tariff increases as the only way Tepco could realistically expect to raise the additional revenue needed to pay back government bail-out money.

Such increases are proving hard enough now, while Tepco still is nominally a private-sector company. Last month the utility proposed raising rates for commercial customers by some 17% (it also wants to raise household rates, which are capped by regulation). Political uproar ensued, but the company appears to be standing its ground—to the benefit of politicians who will have to cope with less of a Tepco loss thanks to the increase. It would be hard for politicians to inveigh against rate increases approved by their own proxies on the board.

Similarly, the government doesn't stand to gain much if Tepco were broken up and sold for parts. In theory this would generate sufficient cash to fund compensation claims. But if it didn't? Good luck finding a buyer for whatever piece of a broken-up Tepco got stuck with the nuclear liabilities, and good luck funding those liabilities without revenue from all the other parts of what as a whole is a viable, cash-generating utility. The government would have to step in to pay compensation directly, in a form of socialism a bit too honest for Tokyo's liking.

Thus are our protagonists not-quite-so-secretly pining for each other, and eventually will admit their love. They're likely to do so in a deal where Tepco gets all the cash it needs in exchange for token government board representation, if any. If it all lacks a certain romance, well, it's business we're talking about. And anyway, marriage also had a certain mercenary quality in Jane Austen's day.

Mr. Sternberg edits the Business Asia column.

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