Mayor Nobuto Hosaka had more than saving taxpayers' money on his mind when he recently invited bids from rivals of giant utility Tokyo Electric Power Co <9501.T> to supply power to his ward in Japan's capital.

Hosaka, like other advocates of reform, hopes altered public sentiment after the nation suffered the world's worst nuclear crisis in a 25 years will spur reforms of an electricity oligopoly dominated for decades by regional utility fiefdoms.

Doing this will reduce our electricity costs, said Hosaka, a former lawmaker from a tiny left-leaning party who now runs a area of Tokyo that is home to some 800,000 people.

But the reason this attracted so much attention was that until now, the voices of ordinary users -- the people, residents of the ward, businesses -- have not been heard, he told Reuters.

By showing that choice (of supplier) is possible and demanding competition, this will give impetus to a more open electricity market.

Hosaka and other reform advocates, however, fear the utilities still hold enough sway to hamper change, despite weakened political clout after the disaster at Tepco's tsunami-ravaged Fukushima plant.

From the people's perspective, the power of a few is still very great and this is obstructing reform, Hosaka said.

Debate on utility reform will formally kick off at an expert panel Thursday, one key strand of a potentially sweeping remake of Japan's energy policy intended to reduce the role of nuclear power, promote renewables, spur energy conservation and address the problem of greenhouse gas emissions.

Reformers are betting that tattered public trust in Japan's utilities will give impetus to changes they argue are needed to give users more choice, bring down electricity costs that disadvantage Japanese firms globally, and promote clean, renewable sources of energy such as solar power.

Because we must increase renewable energy and thoroughly promote energy conservation to reduce reliance on nuclear power and solve the problem of CO2 emissions, we must create an electricity system that promotes renewables and conservation. That means a decentralized energy system, said Satoshi Kusakabe, a former trade and industry ministry official now advising the government on energy policies.

The question is not whether or not to liberalize, but how to liberalize the electricity system, he told Reuters.

The debate from now on will be over the speed and scope of liberalization.

BLOCKED REFORMS

Hosaka's Tokyo ward will take advantage of a system introduced in stages starting a dozen years ago to open the market for large-scale electricity users such as factories and offices.

But those reforms were mostly gutted by politically powerful utilities keen to keep a stranglehold on the market, many experts say. Competitors to the 10 regional utilities account for less than 4 percent of the 60 percent of Japan's electricity market that has been deregulated.

Utilities, Tepco foremost among them, have long had cozy ties with politicians and bureaucrats and also wield hefty influence within Japan's powerful business lobby, Keidanren.

They created a system that imposes a huge handicap on participants with a small number of customers and limited power generation capacity, said Toshihiro Matsumura, a University of Tokyo professor and member of the expert advisory panel on reform. So there is almost no competition.

Utilities and their political and bureaucratic allies have long argued Japan's system of regional monopolies that own both power plants and transmission grids ensured vital stability in the electricity supply. The regional utilities are required by law to provide a stable electricity supply.

But that argument was undercut by rolling blackouts after a massive March 11 earthquake and tsunami devastated Tepco's Fukushima Daiichi atomic plant, while broader public confidence in utilities that had touted nuclear power as safe was shredded.

Opponents to liberalization say stability would be jeopardized ... but we learned from March 11 that a centralized system was so fragile when a big national disaster strikes, said Hiroshi Takahashi, a research fellow at Fujitsu Research Institute and another member of the expert panel.

I strongly believe that a decentralized system would be more robust and stable for electricity supplies, he said.

Trading firms, gas companies and telecom carriers such as Softbank Corp <9984.T>, whose founder Masayoshi Son is keen on renewable energy, are among those likely to want to take part in a deregulated market, along with local governments eager to get involved in renewable energy projects, experts said.

Before last year's disaster, Japan aimed to boost its total power generation capacity to 260 gigawatts by 2020, up from 240 gigawatts in 2010, though it is unclear if Tokyo will continue to target such a large expansion given uncertainty over the role of nuclear power and a new emphasis on energy conservation.

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Japan power sector graphic: http://link.reuters.com/mej23s

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UNBENDING THE GRID

Foremost among the changes reformers want to implement is the separation of power generation, transmission and distribution.

Japan's 10 regional monopolies now own transmission grids in their service areas so new entrants must pay access charges to use them.

When you deregulate, especially to separate functions, you lower barriers to entry for new businesses, said Andrew DeWit, a professor at Rikkyo University in Tokyo who studies energy policy. Under monopoly control, the utilities can make sure these new entrants face a tough climb.

Among the obstacles new entrants must overcome is a rule requiring them to balance supply and demand every 30 minutes, and pay a hefty penalty if any imbalance exceeds 3 percent.

One option to achieve unbundling would be to set up publicly run Independent System Operators (ISO) to coordinate, control and monitor the operation of transmission grids along lines similar to state-based organizations in the United States.

The commitment of Trade and Energy Minister Yukio Edano, who gained first-hand knowledge of energy problems when he served as top government spokesman after the March disaster, seems strong.

Pessimists, though, worry that Edano's zeal is not shared by his boss, Prime Minister Yoshihiko Noda.

They suspect Noda, who succeeded pro-reform Naoto Kan last September, is far more focused on pushing legislation to raise sales tax to pay for bulging social security costs.

The possibility that Noda may decide to call a snap general election -- either in exchange for opposition parties' agreement to his tax reforms or because the opposition blocks those bills in parliament's upper house -- is a big wild card.

But with the wind of public opinion at their back, reformers are intent on seizing what might be their last, best chance.

The utilities are very powerful and so reform didn't happen until now, University of Tokyo's Matsumura said.

They have such power that ... any administration would face severe pressure and it is hard to say what will happen. For that very reason, we must make efforts, he said.

If we miss this chance, the next time will be difficult.

(Editing by Mark Bendeich)

Japan