Inside Tepco's bailout: Japan Inc saves its own

TOKYO: In a choreographed act of contrition, Masataka Shimizu, the president of Tokyo Electric Power, bowed deeply and resigned to take responsibility for the worst nuclear disaster since Chernobyl.

From the outside, the news conference on Friday appeared to follow the familiar script for a Japanese corporate shaming. But behind the scenes, it also represented the successful culmination of a period of intensive deal-making by Tokyo Electric, its powerful allies in Japan's bureaucracy and its main bank.

Those closed-door talks began just three weeks after the March 11 earthquake and concluded with an extraordinary deal that guarantees the embattled utility's solvency, people involved in the talks said.

Tokyo Electric on Friday announced a $15 billion loss for the fiscal year that ended in March with three of its reactors at the Fukushima Daiichi nuclear plant still smoldering from a meltdown and a fourth full of dangerous uranium fuel rods at risk of collapse.

The loss was the largest ever reported by a Japanese company outside the banking sector and reflected the first payment toward a clean-up bill seen as potentially six times bigger than the BP's payout after the disastrous 2010 Gulf of Mexico oil spill.

But the outcome was still far better than the alternative Tokyo Electric executives had most feared.

The company, which once ranked as the world's largest private utility, was able to report that loss because it had won a pledge of government support that relieved the concern of Chairman Tsunehisa Katsumata about how auditors would view its Fukushima liability, according to the people involved in the preparations.

As importantly, Tokyo Electric and its main bank, Sumitomo Mitsui Financial Group, had succeeded in selling a compensation plan for the Fukushima nuclear accident that gave bondholders and creditor banks a shot at a free ride while avoiding a more wrenching restructuring of the utility, the sources say.

Shimizu, 66, announced his resignation near the darkened command center on the second floor of Tokyo Electric's headquarters where he had disappeared in the second week of the crisis after the March 11 earthquake.

After being briefly hospitalized for exhaustion after the disaster and widely criticized for his lack of leadership, Shimizu had come back for a round of ritual apologies for Fukushima evacuees and the resignation.

"We want to sincerely apologise for our nuclear reactors in Fukushima causing so much anxiety, worry and trouble to society," the outgoing president said.

Tokyo Electric shareholders, including its banks, have lost a combined $36 billion since March 11, but the deal struck by the utility spared them a complete wipeout in bankruptcy.

In a series of interviews, a dozen people involved in the discussions that led to the plan to compensate Fukushima victims announced last week by the government of Prime Minister Naoto Kan, described how the utility widely known as Tepco won a government declaration that it was too big to fail at a time when its survival had been in question.

Their account provides a rare look into a policy decision by the Japanese government in the midst of the nation's most dire peacetime crisis and shows how the consensus hardened around an old-school Japanese approach that appeals to public burden sharing at the same time that it protects powerful financial interests.

In the process, Wall Street banks that had proposed a tougher-line restructuring like the bankruptcy of General Motors by the Obama administration were shut out.

So too were those inside the Japanese government who wanted to see a market-driven restructuring of Tepco or an outright? nationalization, according to the people involved in the discussions who asked not to be named.

Part of the calculation was a view that political opponents of the bailout would remain too fragmented to block its adoption in parliament and the Japanese media would not aggressively question a plan that promised to speed payouts to victims of the disaster, one of the principal architects of the plan said.

In the end, Kan - who had exploded in anger at Tepco officials in the first days of the nuclear crisis and promised a more open approach to containing it - was persuaded to support a plan to save the utility that had come together entirely behind closed doors.

Critics of the plan say it leaves the Japanese government on the hook for a higher share of the costs of the Fukushima clean-up, threatens to dampen innovation and new investment by Japan's utilities and opens the door to both higher taxes and higher electricity rates, issues likely to be raked over in the coming parliamentary debate on the plan.

"Everyone needs to be comfortable about leaving public money at risk and essentially letting investors and lenders have a free ride, especially when they were the owners of the enterprise on whose watch catastrophe occurred," said Peter Kaufman, a restructuring expert and president of the New York-based Gordian Group.

When Shigeaki Koga sat down to write his plan on how to pay the massive clean-up bill for Fukushima, he knew he was also writing what could become a career-ending suicide note.

After more than three decades at the powerful Ministry of Economy, Trade and Industry, Koga, 55, was prepared to do something he knew his superiors would view as unforgivable at a government agency seen as an icon of both Japan's post-war success and its deep-seated resistance to change.

In an 18-page, single-spaced memo, Koga picked apart the logic of the backroom deal his ministry was shepherding to save Tokyo Electric Power from bankruptcy because of the mounting liability from the crisis at the Fukushima Daiichi nuclear complex.

By that point, there was little sign that Tokyo Electric was having much success in bringing Fukushima under control. Radiation levels in nearby seawater were spiking and many outside experts had come to a conclusion that Japan's largest utility would only acknowledge six weeks later: three of the Fukushima reactors had gone into a meltdown after being struck by the 9.0 magnitude earthquake and 14-meter tsunami.

The accident had snarled and slowed Japan's response to the damage along its northeastern coast from the disaster. About 25,000 people were missing or dead from the earthquake and tsunami. With nearby evacuation shelters already packed, another 80,000 residents near Fukushima would be driven from their homes because of the threat of radiation.

Farmers were ordered to destroy an early harvest of crops ranging from cabbage to tea as radiation moved through the food chain. Abandoned chickens died in their coops, and feral cows roamed the streets of one town in the "no-go" evacuation zone until they could be put down by agriculture officials in protective white suits.

With no sign of an end to the crisis in sight, a group of Japanese officials in economic policy Tokyo went to work on a pressing question: Who would pay for this?

Estimates for the cost of the compensation to be paid by displaced residents and disrupted business ranged as high as $130 billion in an extended crisis, according to one calculation by Bank of America-Merrill Lynch.

Copyright Reuters, 2011