(originally published in Japanese on 1 November 2024)
In December 2022, it came to light that information that general electrical transmission and distribution (T&D) operators are prohibited from leakage and permitted to provide only for specific purposes had been illegally viewed by and used for business purposes by the electricity retail sector of the parent company or by a fellow group retail company. It was also revealed that since February 2023, a general electrical T&D operator provided account information of the renewable energy business management system that it owns to electricity retailers within the group, enabling these retailers to access the system. In response to these incidents, several committees of the Ministry of Economy, Trade and Industry (METI) and Electricity and Gas Market Surveillance Commission (EGC) discussed ways of regulating the conduct of electric power companies and their internal controls more tightly, resulting in revisions to rules.
In a separate article, we pointed out issues that Japan faces in regulating the power sector unbundling, proposing the deployment of the European Independent Transmission Operator (ITO) model (Hiroshi Takahashi, “Assessment of Power Transmission and Distribution Unbundling (1): Utilizing the ITO Model”). This column, following on from that article, offers an outline of the rules that apply to the ITO model in Europe (Germany and France) in connection to three points relevant to the recent revisions— personnel, prevention of unfair trade practices, and compliance. It also makes comparisons with the revisions to Japan’s conduct regulations to suggest further improvements.
1. Regulations Concerning Personnel
ITOs in Europe are basically prohibited from employing the same person concurrently at another company within the corporate group. This applies both to executives and ordinary employees. Additionally, personnel involved in management are subject to eligibility restrictions based on their previous position as well as restrictions on their employment after leaving a position. In Japan, things are different. While the directors of a general electrical T&D operator are prohibited from holding concurrent positions, the application of restrictions on concurrent positions for employees depends on the duties and conditions at the two companies, a situation that leaves considerable margin for enabling concurrent positions. Furthermore, restrictions on eligibility and employment after departing a position are not legally regulated. They are left up to voluntary initiative.
Table 1: Examples of Legal Conduct Regulations Related to Personnel
In response to the recent data leakage scandal, the government has expanded the scope of the prohibition on concurrent employment. Specifically, the prohibition is now expanded to prohibit persons who are engaged in work that allows them access to information that is subject to nondisclosure at a general electrical T&D operator to concurrently hold any other position in the group that allows them to systematically utilize such information for business use. On the other hand, in terms of personnel exchanges, interview surveys were conducted by the EGC on the efforts of individual companies, leading to a decision to leave this matter to the voluntary initiative of each company.
The recent revisions brought to light the fact that persons in positions that should have unequivocally been subject to regulation were allowed to hold concurrent positions.
To begin with, if any employee concurrently holds a position in a different group company, their attitude will be affected. Strict regulation of concurrent employment, including ordinary employees, at ITOs could be said to not only prevent specific misconduct, such as unfair management of information or exercise of influence within group companies, but also to foster a more independent and impartial attitude in the employees of each company.
German ITOs are obligated to secure sufficient human resources for their power transmission business (EnWG 10a (1)), while also handling personnel recruitment activities themselves. In contrast, in many cases of Japan’s general electrical T&D operators (nine companies that have undergone legal unbundling), personnel recruitment is implemented by the parent holding company or the parent power producer &retailer, or at least jointly implemented with it.
Table 2: Implementation of Personnel Recruitment for General Electrical T&D Operators
ITOs in Europe need to have their own organizational structures that are independent of the vertically integrated company to handle the main part of so-called back-office functions, including legal affairs, accounting, and IT. Furthermore, ITOs are not permitted to use the same consultants or outside contractors as the vertically integrated company for IT systems and equipment. On this point, in the recent scandal in Japan, some of the leak cases were caused by a subcontractor. In these cases, a general electrical T&D operator and its parent electric company contracted the same company, a subsidiary of the parent company, for information system maintenance. To address this, the EGC conducted a survey focused on the development and operation of IT programs used for information management within electric power companies and the sharing of outsourcing contractors. However, the commission did not go into specifics about the regulations needed to resolve this issue, leaving the question open for future consideration. Future efforts of the EGC should be closely monitored.
2．Preventing Unfair Trade Practices (e.g. Information Management, Transactions)
A wide range of regulations are imposed on ITOs in Europe to prevent unfair trade practices. For example, ITOs need to obtain the approval of the regulatory body for development of a code of conduct regarding the prohibition of discriminatory practices and for transactions with the vertically integrated company. In Japan, the involvement of the regulatory body in these matters is more limited.
Table 3: Examples of Legal Conduct Regulations Related to Unfair Trade Practices
Since IT systems play a pivotal role in information management, it is prohibited for an ITO to share any of its IT systems with other group companies. In contrast, in Japan, no separation of IT systems had been mandated. The only requirements were that information was managed so as to restrict access based on content and purpose of use.
However, the recent incidents of illegal data leakage revealed the problematic nature of shared systems. One of the causes of the leakage was inadequate masking under the shared system. The Japanese government responded by calling for the elimination of shared information systems (physical separation).1 Companies have revealed their plans to comply, but separation is expected to be complete at all power companies in Japan (except in Okinawa) until January 2029. 2
Recent measures have made information management more stringent, but it will take a long time to get things totally right. Additionally, it is necessary to prevent the improper use of systems, which will depend on establishing a system of compliance (see below).
The wording of regulations regarding the use of company names in the ITO model is similar to that of Japan. In Germany and France, power transmission company names that include the name of a vertically integrated company are considered to violate the regulations, forcing the company to change its name to one without similarities. In Japan, on the other hand, all general electrical T&D operators use names that include the name of their parent power company.
ITOs in Europe are also required to be located separately from the vertically integrated company and to use a different Internet domain name, which is the basis for communication with third parties.
Table 4: Head Office Locations and Internet Domain Names of Transmission Operators and Their Parent Companies in Germany and France
The head offices of all nine legally unbundled general electrical T&D operators in Japan are located at the same address as their respective parent companies, although there are access controls for separate entry. Of these nine companies, only three general electrical T&D operators use a domain name different to that of their parent company.
Table 5: Internet Domain Names of General Electrical T&D Operators (9 companies) and Their Parent Companies
In Germany, regulations on changing company names and distinguishing domain names are seen not only as problematic in terms of preventing misunderstanding and confusion by consumers, but also in terms of organizational culture. The thinking goes that using a completely different company name to the vertically integrated company for communication among group companies will make the employees of each company more conscious of the fact that they are working for an independent and separate company, thereby enhancing independence and impartiality.3 In Japan, too, it is necessary to focus on the fundamental factors that give rise to a sense of belonging in people, and to promote further efforts to change them, to help increase independence and impartiality through psychological means.
3. Compliance
To ensure thorough regulation of conduct, compliance to internal company rules is essential, so the investigation by the EGC included a look at the state of internal control. As part of the obligation to establish a system, the government decided to issue a new ministerial ordinance to make the development of internal controls mandatory. The implementation of this system will be subject to electric utility audits and must be included in their System Development Report.
In the recent information leakage incidents, the violations occurred because the access rights to information were not adequately managed, even at general electrical T&D operators with physically separate customer information systems. Moreover, in the case of physical separation being implemented from now on, it will take time to complete the transition. Given these circumstances, the government has requested general electrical T&D operators to exercise stricter internal control over the management of information terminals, and the IDs and passwords needed to access their information systems, including those of the renewable energy business systems.
Stating that “the efforts of each company to radically strengthen internal controls are of fundamental importance,” the EGC monitored the efforts of the companies that were recently subjected to disciplinary action. In terms of organizational structure, the “Three Lines of Defense Model” was discussed with reference to the COSO framework, with each company setting up new positions and bodies, and utilizing outside experts to improve their systems. The EGC also identified checklist items for exhaustive internal controls, checked the efforts of each company after it developed a business improvement plan, quantifying the degree of achievement, and providing feedback.
In Europe, too, the development of a specific internal control system depends on the efforts of each company, but in addition to a general legal compliance system, a supervisor to assume responsibility for compliance with regulations for ITO conduct (Compliance Officer) is appointed. The Compliance Officer has a high level of authority and responsibility, as well as independence that is ensured through eligibility restrictions, a prohibition on holding any concurrent position, and requirements for approval by the regulatory body. They are responsible for monitoring compliance, generating annual reports and other tasks.
Table 6: Examples of Legal Conduct Regulations Related to Compliance Systems
Although general electrical T&D operators have been obligated to establish a system and to report on the establishment of such a system, it has become clear that the compliance system was not working adequately. Through a series of measures and monitoring, improvement can be expected, but the monitoring by the EGC will be conducted in a “more modulated” manner. The “Third Line of Defense,” which refers to how the internal audit system should be structured, emerged as a topic for further discussion. Thus, to ensure strict compliance with all applicable laws and regulations, a compliance officer with a high level of authority and responsibility, similar to Europe, should be appointed to take charge of internal monitoring and public accountability.
4. Conclusion
As outlined above, the regulation of conduct in legal unbundling in Japan has been inadequate, in stark contrast to the case of ITOs in Europe. It’s fair to say that there has been a failure to guarantee independence, resulting in the incidents of unlawful information leakage.
Under the European ITO regulations, the regulatory body plays a big role in approving personnel and contracts and receiving reports from Compliance Officers. In Japan, oversight is expected to improve with the new General Audit Office set up by the EGC. To conduct effective monitoring, experts and other personnel are needed, and they need to be trained. An adequate budget is also vital. It is therefore more important than ever to enhance the human and material resources of the EGC.
The deployment of renewable energy on a massive scale over the coming years will require power transmission and distribution networks that are comprehensively upgraded and efficiently operated. General electrical T&D operators will obviously need to run their businesses efficiently, but they must also have the human resources and financial foundation to ensure their independence. The European ITO regulations also guarantee the right to make decisions on management policy and financial planning independent of the vertically integrated company and mandate the appointment of a Compliance Officer to monitor the movements of the vertically integrated company. Meanwhile, it remains to be seen whether Japan has an adequate system for ensuring that general electrical T&D operators are truly independent from their parent power companies in terms of personnel, attitude, and finances. We will need to keep an eye on the system as it continues to evolve.
- 1Separation using a virtual server is permitted if “equivalent to hardware separation, e.g., if a third party manages the hardware.” See Fair Trade Commission, Ministry of Economy, Trade and Industry, “Guidelines for Proper Electric Power Trade,” IV 2 (2)-2 b iii.
- 2Electricity and Gas Market Surveillance Commission, 85th Expert Meeting on System Design, Document 3-1
- 3See Guidelines on EnWG 7(a), which is a regulation for distribution system operators (DSOs). Although these guidelines do not apply specifically transmission system operators (TSOs), the concepts relating to company names, etc. and employee awareness are very relevant to TSOs, which are required to have stronger independence than DSOs. The guidelines apply to DSOs with more than 100,000 customers, which are required by law to be legally unbundled. Gemeinsame Auslegungsgrundsätze III der Regulierungsbehörden des Bundes und der Länder zu den Anforderungen an die Markenpolitik und das Kommunikationsverhalten bei Verteilernetzbetreibern (§ 7a Abs. 6 EnWG) (July 16, 2012)
- 4When the system of compliance officers was designed, there were discussions about prohibiting concurrent positions and the obligation to publicize the status of compliance, but the current interpretation and implementation of the rules are not entirely clear. Briefing Document Submitted to 11th Working Group on System Design (December 24, 2014), p. 18.
