A creaky supervision mechanism is likely to leave room for the power plants to escape regulations and form alliances to push up prices, they warned yesterday.

"The asset break-up and healthy supervision are two wheels of reform," said Zhou Hanhua, a professor at the Institute of Law at the Chinese Academy of Social Science. "A failure in supervision will spoil the whole reform."

On Sunday, the government announced five groups had been carved out of State Power. They each share almost all of the generating assets of State Power, which used to control half of the nation's electricity generating assets and almost all of the transmission grids.

The government hopes the big five - China Huaneng, China Datang, China Huadian, Guodian Power, and China Power Investment - will bid to sell their electricity in an attempt to improve their efficiency and lower electricity tariffs.

A regulatory commission will also be established to become an industry watchdog. It is supposed to stipulate the rules of the industry and suggest electricity tariff rates to the State Development Planning Commission (SDPC).

Zhou said the watchdog will be capable of overseeing the industry.

Customer charges will largely be set by pricing submissions from the new groups to the watchdog.

However, in a bid to avoid market manipulation, analysts said the government still needs to improve the supervision mechanism, including introducing regulatory laws, specifying the roles of different government departments in regulating the industry and exploring and developing the scope for supervision.

"If supervision is fragile, we cannot rule out the possibility of generating companies jointly manipulate prices, especially in areas short of electricity supply," said a State Power analyst.

Zhou, who was involved in the design of the break-up, said the government has already attached importance to the need for supervision, adding the high-ranking reform panel continues to exist to further push the reform.

But he admitted it will take time for a complete regulatory framework to be launched. It involves an administrative reshuffle among the government bureaucracy, which is very complicated and difficult.

At the weekend, SDPC Minister Zeng Peiyan said the government was speeding up to "establish principles of power market operation, set up a power regulatory system, implement the price reform plan and gradually realize competitive pricing."

(China Daily December 31, 2002)