TOKYO (Reuters) - Tokyo Electric Power should face unlimited liability for damages stemming from its crippled nuclear power plant, Chief Cabinet Secretary Yukio Edano said on Monday, indicating Japan’s government will take a hard line against the utility in its rescue plan.
Officials from the government, Tokyo Electric (9501.T), and creditor banks have been scrambling to craft a scheme that would allow the utility to cope with the massive bill of compensating displaced residents while staying in business as a private firm.
The plan under discussion would create a fund to provide loans for and buy preferred shares from Tokyo Electric, commonly known as Tepco. Other utilities would pay premiums as a buffer against future accidents, and Tepco would repay the fund from its profits over several years, sources with knowledge of the talks have told Reuters.
The cap has been one of the most contentious issues in the talks. Tepco and its creditor banks have argued for a limit on compensation, warning that without one Tepco’s credit ratings could be cut to junk, making it impossible for the utility to raise funds, sources say.
The decision on who bears compensation costs will hinge in part on the interpretation of Japanese law, which states that a nuclear plant operator can be granted an exemption from paying damages if an accident was caused by “a grave natural disaster of an exceptional character”.
Edano has repeatedly said he does not believe the accident at Tepco’s Fukushima Daiichi nuclear plant should qualify for that exemption. On Monday he reiterated that stance and said Tepco should not be offered the relief of a payment ceiling.
“At a Diet session in 1961, a grave natural disaster of an exceptional character was explained as one beyond the imagination of humankind,” Edano told a parliament committee. “The (March 11) earthquake was a very large one, but it was of a scale that had been experienced by humankind in the past.”
Tepco has started making compensation payments to residents and local governments near the plant who were forced to evacuate. But it has yet to determine how much it will have to pay in total.
JP Morgan had estimated Tepco could face 2 trillion yen ($25 billion) in compensation losses in the financial year that started last month, while Bank of America-Merrill Lynch had said the bill could reach $130 billion if the crisis drags on.
While the banks, Tepco and the government are divided over the cap issue, all parties are keen to get the scheme in place as soon as possible to calm financial markets jittery over the risk of a Tepco collapse.
The Fukushima crisis has jolted Japan’s entire $860 billion corporate bond market. Tepco is the single biggest bond issuer and spreads on other utilities have widened on the prospect they will also face higher funding costs.
Ratings agencies have made a series of downgrades to Tepco’s once-stellar credit status. Moody’s has lowered its rating to Baa1 and Standard and Poor’s to BBB+ now, although both are still 3 notches above junk.
“The scheme needs to enable Tokyo Electric to get investment-grade ratings from Standard & Poor’s and other rating agencies and officials are now working on ways to achieve that,” said one source with knowledge of the discussions.
Shoring up confidence in Tepco’s bonds would have a positive knock-on impact on other utilities, which rely on the corporate bond market to get funds for capital investments.
“I think everyone involved in making the scheme shares the same view that we are not bailing out Tokyo Electric, rather we are trying to protect the system, including a stable power supply and bond market,” the source said.
Even without a cap on liabilities, credit agencies would likely give Tepco an investment-grade rating if the government somehow shows its intent to fully support Tepco as a private business, the source said.
Credit spreads for Tepco bonds are around 150 basis points above equivalent Japanese government bonds, Japanese underwriting sources said. They have narrowed since blowing out to about 400-500 basis points after the March 11 earthquake and tsunami, from just 8 basis points prior to the disaster.
Tepco’s five-year credit default swaps, contracts insuring its five-year debt against default, stood at around 209 basis points by late Monday after peaking at more than 400 basis points in late March.
Tepco’s shares have lost about three-fourths of their value since the crisis. They closed Monday up 0.2 percent at 426 yen.
Reporting by Mari Saito, Taiga Uranaka, Chikafumi Hodo and Kentaro Hamada; writing by Linda Sieg; Editing by Nathan Layne and Lincoln Feast