By Aaron Sheldrick and Osamu Tsukimori
TOKYO (Reuters) - Japan's upper house passed legislation on Wednesday to start the most ambitious reform of its electricity sector since 1951, a process prompted by the Fukushima nuclear crisis that may end with the break-up of powerful regional monopolies.
The reforms, including the establishment of a national grid and the liberalization of the power market for homes, are central to Prime Minister Shinzo Abe's drive to overhaul the economy, as high energy costs threaten to derail efforts to reverse decades of stagnation.
Regional monopolies, including Tokyo Electric Power Co and Kansai Electric Power Co, supply almost 98 percent of Japan's electricity and terms for access to their transmission lines make it onerous for new entrants.
Wrenching control of transmission from the monopolies to create a national grid became a big issue after the March 2011 earthquake and tsunami that sparked the Fukushima disaster and highlighted an inability to transfer power to areas suffering shortages.
The power law was passed by Japan's lower house earlier this month and sailed through the upper house with 202 votes in favor and 29 against, a parliamentary official said by phone.
While the energy companies say they support the thrust of the proposed changes, they have repeatedly urged the government to give priority to stable power supplies and say reform should be slowed down if this cannot be guaranteed.
The utilities have resisted attempts since the 1990s to liberalize the industry. The companies and their affiliates have ties with politicians, fund their campaigns and often give government officials executive roles.
"There are quite a few issues to resolve," Makoto Yagi, chairman of the Japan Federation of Power Companies and president of Kansai Electric, said in a statement after the vote.
"In the separation of power generation and transmission, in particular, to ensure stable supplies, arrangements and rules to supplement the split need to be in place," he said.
The monopolies were set up in 1951 during the American occupation after World War Two and followed the U.S. model at the time, with regional utilities controlling all aspects of generation and transmission.
Tokyo Electric, which before the meltdowns at its Fukushima Daiichi facility was the most powerful utility, is now under government control and being split into separate units. That process will probably be the template for broader change.
The legislation calls for the creation of a national grid company in 2015.
"Ensuring high voltage transmission and distribution assets are optimized across Japan rather than by individual monopolies is key to delivering affordable electricity to Japanese consumers and allowing access to a broad range of generation assets including renewable energy," said Tom O'Sullivan, founder of independent energy consultancy Mathyos Japan.
The government plans to liberalize the market for homes, an important source of earnings for power companies, by 2016.
The market for customers using more than 50 kilowatts was opened up in 2005 but utilities can still block supplies from independent power producers as they control transmission lines.
The most ambitious phase of the reform envisages breaking the monopolies into separate generation and transmission companies by 2020 and abolishing price controls.
(Editing by Alan Raybould)