For three of the 11 years I lived in Tokyo, I called on the three largest power companies in Japan for Lehman Brothers. I visited Tokyo Electric Power 150 times, and I’ve spent time at one of their largest power plants. This blog sheds some light on how TEPCO management has historically thought about risk. Our prayers go out to the heroes fighting to prevent disaster on the ground at the Fukushima plant and to the residents of Japan whose lives are now at risk. None of this should have been necessary.
My first introduction to Tokyo Electric Power was courtesy of the head of Lehman Brothers Japan, the late Kiyonobu Shimazu. We met with the director in charge of finance at Tokyo Electric Power in his regular hostess bar, paid by TEPCO, that featured only non-Japanese women. The only thing I remember about that evening is that the director was a pleasant guy who would have been fired by any American company for some of the remarks he made to hostesses that night.
The working level finance people at TEPCO were also nice guys, good at routine tasks but not good at anything that required creativity or imagination. As a female pilot for United Airlines told me on a long flight to London, “Japan Airlines pilots are very good as long as what is happening to the plane is in the flight manual.” TEPCO gave a lot of bond business to Lehman and we appreciated it. From 1987 to 1990, I visited TEPCO’s offices near the Imperial Hotel at least 150 times.
After I left Lehman to start Kamakura, I actively tested the interest of TEPCO and its peers, Kansai Electric in Osaka and Chubu Electric in Nagoya, in financial risk management. I didn’t have the engineering background to help them with the kind of engineering disaster they are facing today, but it was only 4-5 years after Chernobyl and nuclear plant risk was something we discussed often.
TEPCO and Kansai Electric both said the same thing to me about financial risk, the risk that oil prices might move sharply while retail electrical rates might not, squeezing the companies’ finances. They said,” We don’t have any financial risk because our regulator (then the Ministry of International Trade and Industry) immediately passes on higher fuel costs to our business and retail clients.” I didn’t believe that was true, and so I visited the Electric Power Association and collected 40 years of history on retail electricity rates and oil prices. I did the statistics and found that there was a lagged reaction of retail electric rates to changes in oil prices, and it took a full 7 years for the power companies’ margin to be restored to normal after an oil price “shock.”
Then I put together a presentation that effectively said the power companies did indeed have at least 7 years of price risk and explained how a hedging program could alleviate the risk. Chubu Electric understood the message the best. My contact in finance, whose name was Sekiya, was just as candid as he was smart. He told me, “I understand what you’re saying and I agree with it, but it will take my colleagues at least 10 years to be sophisticated enough to act on the message. Why don’t you come back then.” “Then” meant 10 years from that date.
Persistence is one of my worst traits so I clung to another message that came from all three power companies, especially TEPCO. “We don’t mind having risk as long as we’re just like the other power companies, because then no one can blame us if something goes wrong.” It was the Japanese power company variation of John Maynard Keynes’ famous comment about bankers. So I tried another tack, and I dug into the statistics that showed that TEPCO, Kansai and Chubu had dramatic differences in their reliance on nuclear power, water power, and oil-fueled power plants. I went back to them and said, “You want to be the same as your peers, but you’re not. You need to manage risk in order to be the same as your peers.” We talked specifically about the Chernobyl type risk from a financial point of view since I was not well educated enough to handle the engineering aspects.
After all of that work, I reached a conclusion that I’ve held for many years. In risk management, the people who need expert help the most are least likely to ask for it.
In this crisis, many heroes will be called to duty. There are many heroes in Japan, and they will sacrifice their lives for their fellow citizens. There won’t be many high executives of TEPCO among this group. We pray for these heroes and we wish that senior management had done a better job during the 40 year life of the Fukushima plant to prevent this disaster from occurring. We pray for Japan.
Donald R. van Deventer
Honolulu, March 15, 2011