There has been misleading press coverage regarding "Business Return" under the cost-plus system. The facts are as following:
"Business Return"
"Business Return" under the cost-plus system refers to costs (financing costs) for interest and stakeholder dividends and is not equivalent to "profit" that a company may use freely.
Fairness is required in calculating "Business Return" due to the public nature of the business (referred to as "fair return principle"), and calculation methods are stipulated according to Ministry of Economy, Trade and Industry (METI) Ordinance (Public Power Business Power Supply Provisions Rate Calculation Rules).
·This system has been adopted for the following reasons:
To ensure stable power supply, power stations, transmission lines, substations, and other high-cost facilities that are required to meet power usage (demand) must be maintained at all times. These activities are funded through loans from financial institutions, corporate bonds, shareholders' equity, and other means.
In order for power companies to continuously maintain and finance such capital, it must continue to pay interest on loans and corporate bond capital as well as shareholder dividends, thus regulations allow it to be calculated into the cost of rates.
·Calculation rules are stipulated to ensure fairness of return.
Specifically, the METI Ordinance (Public Power Business Power Supply Provisions Rate Calculation Rules) stipulates that a certain rate of return is multiplied against the value of business assets (rate base) invested into the business and recognized as necessary and effective for efficient administration of the power business.
Public services such as gas and railways also use this rate base method.
Please refer to Attachment "REFERENCE: Concept of Total Cost Calculation" for details.
<Reference>
Concept of Total Cost Calculation(PDF 214KB)
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