The pilot scheme is set to begin in Heilongjiang, Jilin and Liaoning provinces and parts of the Inner Mongolia Autonomous Region.

These areas have extensive transmission networks in place that will allow electricity to be delivered effectively, stated the State Electricity Regulatory Commission, the industry watchdog.

The move is being viewed as a test run in China's attempts to create a competitive national energy market by forcing generators to cut overheads.

The commission also plans to launch a similar scheme in eastern China. It will allow generating companies to bid to sell electricity through a so-called "power pooling system".

An insider said the commission plans to ensure 20 percent of power consumption in Northeast China is sold through the bidding process initially.

The government currently guarantees electricity tariffs and electricity sales for almost every power plant and generator, ensuring profits for power companies.

Analysts say the reform will promote competition in the industry and help integrate the fragmented provincial power market. It will optimize electricity distribution within regional markets.

Local governments tend to thwart the flow of electricity into their own regions to help local companies escape competition.

The commission stated yesterday only those generators with a production capacity of more than 100,000 kilowatts will be required to participate in the bidding.

This will avoid sweeping bankruptcies of smaller and more fragile generating companies.

In the longer term, these plants will also be forced to participate in competition, the circular said.

The commission said it picked Northeast China to spearhead the reform partly because there is an electricity supply surplus in the region.

The region has also accumulated experience in electricity price bidding following a number of experiments by the government in past years.

But the challenge remains daunting, analysts said.

Although there are extensive transmission lines across the region, little electricity has flowed among the provinces because of local protectionism.

To cushion the impact of competition, the commission said it is considering whether to establish a special fund with the money saved during the bidding process. The fund will be used to cushion fluctuations in the electricity price during emergencies.

(China Daily June 12, 2003)