Case 9 Yasuzaemon Matsunaga: Electrification Leader Establishes Private Sector-Led Public Utility Operations

Abstract

This chapter introduces Yasuzaemon Matsunaga, who held top management positions at Kyushu Electric Light Railway and its predecessor companies, and then Toho Electric Power.

Encounter with the Electric Power Business

Just as Kobayashi was the undisputed champion of urbanization, Yasuzaemon Matsunaga was undoubtedly the standard-bearer of electrification.¹

Born in 1875 (Meiji 8) as the eldest son of a family running its own business in Iki Island, Nagasaki Prefecture, Matsunaga entered Keio Gijuku in 1889, where he met his lifelong ally and rival, Momosuke Fukuzawa (adopted son-in-law of Yukichi Fukuzawa). After a brief period as a salaried employee of the Bank of Japan, Matsunaga became a lumber merchant (Marusan Shokai) and a coal and coke merchant (Fukumatsu Shokai), both of which were joint ventures with Momosuke Fukuzawa.

Having established contacts in northern Kyushu through his handling of coal dust and coke, Matsunaga was asked to become the managing director of the Fukuhaku Electric Railway in Fukuoka City. This position focused his attention on electricity as a source of power. In 1910, he established Kyushu Electricity and became managing director of an electric power business. Meanwhile, Momosuke also became president of Fukuhaku Electric Railway and director of Kyushu Electricity. Thus, Matsunaga and Momosuke began to build their careers as electric power business managers almost simultaneously, like a pair in a three-legged race.

Practicing “Scientific Management”

Matsunaga’s career as an electric power business executive can be roughly divided into two phases: first, the period from 1908 to 1922 (Meiji 41—Taisho 11), when he held top management positions at Kyushu Electric Light Railway and its predecessor companies (Kyushu Electric Light Railway was formed when Hakata Electric Railway—formerly, Fukuhaku Electric Railway—and Kyushu Electricity merged in 1912); and second, the period from 1922 to 1942 (Taisho 11—Showa 17) when he served in top management of Toho Electric Power. Matsunaga’s approach to running the electric power business was outstanding in three respects: his emphasis on customers; his development of power sources using hydro and thermal power; and his innovation in financing.

In emphasizing customers, Matsunaga consistently adopted low-rate, high-quality service to cultivate new clients. During his tenure at Kyushu Electric Light Railway, he drastically reduced electric light fees and removed a restrictive clause in the supply rule that said “no [power line] extension will be granted unless at least 30 lights are to be set up per 1 electricity pole.” Removal of this stipulation meant that electricity could be supplied even to remote areas.

Matsunaga’s fostering of a customer base eventually led to improved performance by Kyushu Electric Railway and was a major force in the company’s rise to dominance in northern Kyushu’s electric power sector. Matsunaga’s emphasis on customers remained unchanged during his time at Toho Electric Power. By the time he took over the management of Kansai Electric, the predecessor of Toho Electric Power, frequent power outages during the days of Nagoya Electric Light Company (the predecessor of Kansai Electricity) were causing dissatisfaction among Nagoya residents. Matsunaga took emergency measures such as automatic disconnection from main power lines, reinforcement of repair teams, establishment of temporary substations, and buying more electricity. He even brought his own bed to the central feeder station to be there around the clock, resolving the outage problem in about a year.

After the company [Kansai Electricity] was reestablished as Toho Electric Power, Matsunaga continued to improve the facilities by increasing the voltage of the transmission lines, improving the feeder lines, laying special high-voltage transmission lines, and building new power plants. As a result, Toho Electric Power regained Nagoya residents’ trust within a few years of its establishment.

The policy of developing hydro as well as thermal power sources contributed greatly to lowering the cost of power generation.

The waterway-style, hydro power generation system adopted by many electric power companies of the time was fundamentally flawed. In winter, when demand for electricity rose, water was in insufficient supply, while in summer season, when demand declined, there was an overabundance of water. Therefore, according to Matsunaga, “If hydroelectric facilities are designed for maximum load in winter, the surplus power will increase in summer.²” However, “in order to develop hydro power generation in the most economical manner, other methods must be devised to compensate for the shortage of power generation capacity due to reduced water flow [during the winter].³” Matsunaga advocated the adoption of a combined hydro and thermal system that would utilize cheaply built thermal power plants as backup.

As mentioned above, the merger of Hakata Electric Light Railway and Kyushu Electricity brought about the establishment of Kyushu Electric Light Railway; Matsunaga played a leading role in achieving this merger. He envisioned the integration of Hakata Electric Light Railway, whose electricity division focused on thermal power generation, and of Kyushu Electricity that was focused on hydroelectric power generation. The integration established a combined hydro and thermal power supply system, thereby lowering the cost of power generation.

The combined use of hydro and thermal power generation advocated by Matsunaga was put into full practice when Toho Electric Power built the Nagoya Thermal Power Station, Najima Thermal Power Station, and Maeda Thermal Power Station. Such construction was daring at a time when mainstream thinking held that “hydropower is the panacea” and “thermal power puts the country in peril.” When the economic efficiency of the combined use of hydro and thermal power was confirmed, industry-wide adoption began—long after Matsunaga first advocated the method.

Yasuzaemon Matsunaga when he was president of Toho Electric Power in 1933. (Provided by Mainichi Shimbun)

Innovations in financing were also highly relevant to cost reduction. Matsunaga pointed out that “highs and lows of interest rates do affect the cost of electricity.⁴” Instead he focused on developing stable, low interest sources of financing. Toho Electric Power’s actions, such as its aggressive issuance of foreign bonds and quick response to the yen’s decline after 1932, its campaign to expand the maximum bond issuance limit, and its utilization of a new collateral system (open-end mortgage system) at the issuance of bonds, reflected Matsunaga’s ingenious approach to financing.

Toho Electric Power’s electricity generation costs declined more than those of its peers thanks to combined use of hydro and thermal power and to innovative financing. For instance, the equipment cost per 1 kW in a given sales area around 1931 was only 792 yen for Toho Electric Power, compared with 884 yen for Tokyo Electric Light.⁵ Contemporary economic magazines praised Matsunaga’s management skills, calling it “scientific management.” Matsunaga became one of the most prominent managers in prewar Japan’s electric power industry.

Matsunaga’s Foresight in “Personal Opinion on Electric Power Regulation”

In the Japanese electric power industry of the 1920s, the so-called power war—a battle for large customers in major cities—intensified, with debates over regulating power companies rapidly becoming a social issue. Here, too, Matsunaga demonstrated foresight setting him apart from other business leaders. In “Personal Opinion on Electric Power Regulation” published in 1928, he foresaw the 1951 reorganization of the electric utility industry 23 years in advance, and clearly displayed his visionary ideas.

In a Nikkei newspaper column published after the war, Matsunaga recalled his 1928 proposal that “The entire country should be divided into nine regions, and a one-area, one-company system should be adopted. Small companies should be combined if possible and if not, they should be pooled and allowed to monopolize supply areas. Public and government thermal facilities, such as many owned by the Ministry of Railways, should be transferred to the private sector to improve the load and dispersal rates of electricity nationwide, and rates should be based on a license system. A “Public Utilities Commission” should be established as an oversight body.⁶” Matsunaga pointed out that his suggestions from 23 years earlier were “almost equivalent to the post-war reorganization which resulted in the current status quo.”

Why was Matsunaga the only one of the many managers in the electric power industry to show such foresight concerning control of electric power? The answer lies in Matsunaga’s valuing of research and its implications. Momosuke Fukuzawa, his lifelong friend and rival, said, “I am no slouch when it comes to research, but Matsunaga’s thoroughness is so impressive that I would completely surrender.⁷” Matsunaga sent a total of 42 Toho Electric Power employees (including directors) overseas for observation and practical training, establishing a Research Department as a permanent in-house unit.

Although these measures were unprecedented for an electric power company at the time, the information that overseas employees obtained from Western countries, and the findings from a series of studies carried out by the Research Department, shaped Matsunaga’s argument for regulation of the electric power industry. Unlike Matsunaga, Fukuzawa prioritized hydro power development, advocating nationalization of the electric power industry and separating electric power generation/transmission from electric power distribution. Fukuzawa’s concept of electric power industry regulation called for government management, separation of power generation/ transmission and distribution, and hydro-centered development. It was implemented as the wartime government’s policy on electric power. On the other hand, Matsunaga’s concept of private sector-led management, integrated management of power generation/transmission and distribution, and combined hydro and thermal systems, became the basis for postwar reorganization of the electric power industry.

In other words, Fukuzawa and Matsunaga foresaw two major epochs in the history of the Japanese electric power industry—state control over the electric power industry and its subsequent reorganization—long before they happened, earning Fukuzawa the title of “King of Electricity” and Matsunaga the “Demon of Electric Power.”

Retrospectively, however, Fukuzawa achieved success in hydropower development centering on the Kiso River system (called the “Electricity King” in recognition of this), but was unsuccessful in the electric power distribution business where service to customers was the key. Matsunaga had no choice but to help with the restructuring of Kansai Electric, the predecessor of Toho Electric Power, given that Fukuzawa, as president of Nagoya Electric Light (the predecessor of Kansai Electricity) had poorly managed the power distribution business and drawn the ire of Nagoya residents, requiring Matsunaga to rectify the situation.

The Japanese Government Imposes Controls over the Electric Power Industry

Although Matsunaga’s concept of regulating the electric power industry showed foresight, the Japanese electric power industry did not follow a straight path to reorganization in line with Matsunaga’s 1928 “Opinion” publication, but rather took a “long detour⁸” under government control. State control of the electric power industry was unsuccessful in the following areas:

• 1. It shut down the creative efforts of power industry managers and the vitality of private power companies.

• 2. A centralized system of mostly hydroelectric power generation and transmission led to problems with power supply stability and generation costs.

• 3. It led to complete separation of the generation/transmission business from the distribution business.

Despite these weaknesses, state control was enforced due to the rise of nationalist ideology and other factors outside the economy. It is also true, however, that voluntary regulation by the electric power industry in the 1930s had unmistakable drawbacks, lending persuasiveness to the case for state control. Simply put, the problem was that wholesale and retail power companies were allowed to coexist.

One reason the electric power industry did not accomplish voluntary regulation as envisioned by Matsunaga in the 1930s was his own fiery temper that led him to harshly criticize the management of other companies in the industry. At the time, the Federation of Electric Power Companies of Japan (FEPC), established in 1932, was the leader in promoting voluntary regulation, but Matsunaga’s evaluation of the federation was ambivalent. On the one hand, the FEPC’s power in deterring competition was in line with Matsunaga’s vision; on the other, the FEPC upheld maintenance of the status quo and allowing the permanent coexistence of wholesale and retail power companies. Coexistence of wholesale and resale contradicted Matsunaga’s goal of integrating electric power generation/transmission and distribution. Consequently, he withheld direct judgment on the FEPC immediately after its formation, but when the federation decided to resume hydroelectric power development in 1933, he vehemently opposed it as a return to hydroelectricity-oriented policy. Without restraint, he repeatedly criticized other electric power industry managers.

In addition to Matsunaga, another person within Toho Electric Power was frustrated with the lack of progress in voluntary regulation by the power industry. This was Daijiro Ide, a key member of the company’s Research Department who had long served as Matsunaga’s right-hand man. Ide was indispensable in helping Matsunaga with a series of plans to control the electric power industry. However, Ide became increasingly frustrated with the inadequacy of voluntary regulation and eventually left Toho Electric Power, becoming a leading proponent of state control. In contrast, while also frustrated, Matsunaga remained a believer in the private-sector-run electric power industry. Fiercely clashing with his former ally Ide, Matsunaga remained permanently opposed to state control.

The main opponents of state control of the electric power industry were the industry’s executives, with Matsunaga the outstanding figure in terms of comprehensiveness and consistency of arguments. Yoshizo Ikeo, president of Nippon Denryoku (Nippon Electric Power), often referred to alongside Matsunaga as a leading opponent of state control, was inconsistent in his opposition, and ultimately accepted state control. This is demonstrated by Ikeo’s appointment in 1941 as president of Nihon Hatsusoden, the company that served as the keystone of state control of the electric power industry.

On the other hand, Kiwao Okumura, a well-known proponent of state control, was an innovative bureaucrat and researcher at the Cabinet Research Bureau, the same organization that prepared the 1936 proposal igniting the state control debate. As a bureaucrat, however, Okumura needed support of industry insiders to create a feasible proposal for state control. One such insider was Daijiro Ide who had become an expert member of the Cabinet Research Bureau after leaving Toho Electric Power.⁹ Thus Ide was the main player behind the creation of the Cabinet Research Bureau’s draft proposal. In the resulting debate over state control of electric power, the erstwhile allies Matsunaga and Ide headed two opposing camps.

Despite the strong opposition by Matsunaga and others, the government imposed state control over the electric power industry in 1939. Almost all private electric power companies, including Toho Electric Power, were forced to dissolve by 1942.

Matsunaga Leads the Reorganization of the Electric Power Industry

Thirteen years of state control of the electric power industry finally ended in 1951, 6 years after Japan’s defeat in World War II. Unsurprisingly, Matsunaga led its reorganization.

Following his defeat in the state control debate, Matsunaga lived in seclusion during the war, but returned to public life in 1949 as the chairman of the Electricity Industry Reorganization Council. Based on his “Opinion” publication from 20-odd years earlier, he spearheaded the effort to create a system dividing Japan into nine regions, integrating power generation, transmission, and distribution, with private companies in charge of the power facilities’ ownership and operation.

The GHQ (more precisely, GHQ/SCAP, or the General Headquarters Supreme Commander for the Allied Powers), which held absolute power during the occupation of Japan, initially insisted on an electric utility restructuring plan that differed from Matsunaga’s but eventually supported his plan. The GHQ’s reorganization plan was in flux, with plans to divide Japan geographically into five, seven, nine, or ten electrical regions. The difference in ability between Matsunaga who had a thorough knowledge of Japan’s electric power industry, and the GHQ who had conducted research in haste, was obvious and the reorganization was implemented under Matsunaga’s leadership.

His overall prewar experience as described above was an important factor underlying Matsunaga’s “scientific management” approach to the electric power industry. Moreover, Matsunaga brought on board some of the most talented people in Japan’s electric power industry before and after World War II. For example, a trio of supporters played an important role in formulating his proposal for the nine-block system: Kazutaka Kikawada of Kanto Electric Distribution, Yoshishige Ashihara of Kansai Electric Distribution, and Michio Yokoyama of Chubu Electric Distribution.¹⁰ These three later became presidents of Tokyo Electric Power, Kansai Electric Power, and Chubu Electric Power, respectively, standing in the frontline of Japan’s electric power industry during the ensuing period of rapid economic growth.

The nine-block system that came into being in 1951 after reorganization of Japan’s electric power industry’s under the Matsunaga Plan proved successful and lasting. Despite a superficial change with the 1988 privatization of Okinawa Electric Power, making it a 10-block system, it has basically remained the same to this day.¹¹

Two Contributing Factors to Matsunaga’s Ascent

How did Matsunaga manage to play such an important role in the history of Japan’s electric power industry? There were two key contributing factors.

First, Matsunaga’s customer-centric approach underlay his efforts. He pioneered a novel business model featuring combined hydro and thermal power generation, integrated management of power generation/transmission and distribution, and initiated innovative financing. In the history of the Japanese electric power industry, many managers have tried to enter new markets and grow their businesses by talking about a “customer-centric” approach, while aggressively lowering prices for a short term. Most of them, however, lacked a business model that would ensure a customer-centric stance over the long term, and they eventually disappeared.

Although few, there were managers in addition to Matsunaga, such as Momosuke Fukuzawa, who proposed progressive business models. However, as seen in Fukuzawa’s model, most of them were rooted in supply-side logic, obviously inferior in substance to Matsunaga’s customer-centric model. Matsunaga was a rare manager in the electric power industry in combining a customer-oriented approach with a progressive business model.

Second, Matsunaga became a rallying point for talented individuals who played active roles in the development of Japan’s electric power industry. As noted, Matsunaga met an irreplaceable “life-long rival” in his younger days, Momosuke Fukuzawa who overshadowed him as a businessman in his early days as an investor and as a member of the House of Representatives. However, Matsunaga surpassed Fukuzawa in managing the electric power industry. Without exaggeration, we may say that the drive fueling “Matsunaga’s thoroughness in his research,” ultimately contributing to his unparalleled leadership of Japan’s electric power industry, was his strong rivalry with Fukuzawa.

Also notable was Matsunaga’s relationship with Daijiro Ide, who became his adversary in the process of implementing state control of electric power industry. Ide was the main player behind imposition of state control on the electric power industry. However, the mutual trust that was formed between Matsunaga and Ide, allies during their earlier days at Toho Electric Power, continued throughout their lives. That Matsunaga entrusted Ide in 1959 with the publication of the “History of Toho Electric Power” (edited by Toho Electric Power Company History Compilation Committee, 1962) 8 years after the reorganization of the electric utility industry (i.e., the end of state control) is a true testament.

In addition, the trio of his supporters—Kazutaka Kikawada, Yoshishige Ashihara, and Michio Yokoyama—played a significant role in the reorganization of the electric utility industry. Without their help in promoting the reorganization efforts, Matsunaga might not have attained success.

Establishment of the “Private Sector-Led Utility” Model

Even after the reorganization, Matsunaga continued to play an active role in the electric power industry. In 1953 he became president of the Central Research Institute of Electric Power Industry (CRIEPI). Overcoming government opposition, Matsunaga facilitated the primary use of thermal power over hydro power and the use of oil over coal. Such use of fuel contributed greatly to realizing a “low-cost, stable electricity supply,” one of the factors behind the rapid growth of the Japanese economy. People came to call Matsunaga the “Demon of Electric Power” in awe of the innovations he accomplished one after another, fighting government regulations until he passed away in 1971.

The first electric power company in Japan, Tokyo Electric Light, was established in 1883 (Meiji 16). Ever since, the major characteristic in the development of Japan’s power industry (except the period between 1939 and 1951 when it was under state control), has been private ownership and operation. This contrasts with the telecommunications industry that was also under the jurisdiction of the Ministry of Posts and Telecommunications before World War II, but was kept under the direct control of either the government or a public company from its inception in 1869 until the privatization of the Nippon Telegraph and Telephone Public Corporation in 1985.

Unlike the telecommunications industry, there were two reasons for the dominance of private companies in the electric power industry:

• (a) differences in the initial conditions;

• (b) differences in subsequent conditions.

Regarding (a), the Meiji government placed decisive importance on the telecommunications industry for its role in national defense and security. Regarding (b), the accumulation of organizational capacity within the private power companies to manage the electric power industry basically blocked several nationalization attempts (except wartime state control implemented amid the rise of nationalist sentiment).

Japanese private ownership and operation of its electric power industry differs from the state-run or public-managed electric power industry in major European countries. It also differs from the U.S. electric power industry in that Japan’s private sector companies have maintained large-scale operations. In short, Japan adopted a system that emphasized private-sector dynamism, based on concerted efforts to accomplish the task of “providing a stable supply of affordable electricity” for the benefit of the public.

This private-sector-led utility model would continue even after the full liberalization of electricity retailing in 2016 and the separation of power generation and transmission in 2020. Matsunaga was the key figure in establishing the internationally unique “private sector-led public utility” in Japan’s electric power sector.