The State directive is an attempt to create competitive regional power markets.

The pilot scheme is expected to be launched in East China's Jiangsu, Zhejiang, Anhui and Fujian provinces, the State Electricity Regulatory Commission said yesterday.

The move is regarded as an experiment as China attempts to create a nationwide competitive market by forcing generators to cut their costs.

The circular said the commission is drafting new rules for the move and the bidding will start in April.

An insider said the commission is thinking about ensuring that 15 per cent of a region's power consumption is sold through the bidding process.

At present, the government guarantees electricity tariffs for almost every power plant and generator, to ensure profits for power companies.

The government hopes the so-called power pooling system can help bring down the price of electricity and force power plants to reduce their overheads.

It may also help integrate the separated provincial power market, in a bid to optimize electricity distribution within regional markets.

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

In February, the commission said it was also mulling over a similar power pooling scheme for the nation's northeast.

Analysts say the pooling schemes are another clear step forward in market-liberalization.

The government got rid of the State Power Corp's nationwide monopoly in December and created five competing companies and two grid companies to promote competition within the sector.

In yesterday's circular, the commission admitted that the timing of the pilot scheme was not perfect, as the current power shortage in China's eastern regions may discourage competition.

The commission, however, maintained that it will use every avenue to try and make it as successful as possible.

"The market condition has been changing all the time," the circular said.

"The market mechanism we design should be flexible to survive in all conditions."

Daunting challenges lay ahead, analysts say. Electricity prices vary in different provinces, which makes it hard to compare bids from different plants.

Technology problems may also hinder the smooth flow of information related to the bidding process.

According to the circular, the commission will proceed with the reform "gradually and prudently, taking full consideration of the unbalanced economic development of different regions."

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