The writing is on the wall, it seems, for one of the nation's most anachronistic duopolies.

With sweeping changes engulfing much of China's commercial sector, until this month they had not touched one vital corner of the power industry.

For years users have been restricted to buying electricity from just two companies - State Grid Corp and China Southern Grid Corp - which transmit and distribute electricity from generating firms to end users.

But radical change is coming. Earlier this month, Jilin Carbon Group signed a landmark agreement to directly purchase power from Jilin Longhua Thermal-Power Plant in Jilin Province in the northeast. It is the first legal contract in China to allow a generating firm to bypass the grid company and sell electricity directly to a large user.

Media reports said the deal could lower the existing electricity tariff of Jilin Carbon by 0.04 yuan (0.5 US cents) per kilowatt hour, or 8.9 per cent. This could save the company at least 20 million yuan (US$2.4 million) a year on its electricity bill.

The generating firm Longhua can also raise its on-grid electricity rate, while the local grid company reduces the transmission charge to make the balance.

Experts and industry watchers say the move will help break the monopoly of the grid companies in electricity sales. The direct power supply sales, which allows buyers and sellers to negotiate prices, will improve power generating services, and help users to lower the costs.

But for power grid companies, say the experts, the reform strikes a blow as it curbs overcharging.

At present, the government sets the electricity supply rate and allocates the amount of electricity generation for almost every generator. The current pricing system, however, does not specify the transmission prices, leaving room for grid firms to manipulate a premium over the reasonable transmission charge.

And grid firms have tended to slash the electricity tariff for additional power generation beyond the quota the government sets for generating firms.

"It is a revolution of the trading mechanism between electricity users, grid companies and generating firms," said Shi Yubo, vice-chairman of the State Electricity Regulatory Commission, the power sector watchdog, of the Jilin deal.

"It is conducive to introducing competition in the forefront of power sales...conducive to separating the power transmission and distribution business, and to create a transparent pricing mechanism," added Shi.

The direct supply deal is a fresh step forward in reforming the power industry since the government launched a sweeping overhaul in late 2002.

In the past three years, the government has split up the State Power Corp into five independent generating firms and two grid companies. The State Power Corp used to control half of the country's power plants and almost all the transmission and distribution assets.

But generating firms complain that they lose control over profits as the on-grid electricity tariff and power generation is capped by the government. For their part, users complain that they are restricted from choosing their power suppliers.

Following the Jilin deal, the commission vowed to step up efforts to promote direct supplies to more pilot areas.

Several areas, including Central China's Hubei Province, are studying the proposals with a view to carrying out similar reforms.

Experts say, however, it is premature for the direct supply to expand massively and rapidly.

The commission has not yet hammered out a clear-cut mechanism to push through the reform, and it seems the commission is carrying it out in a case-by-case approach, experts say.

"Many of the problems have to be studied before moving further on," said Wu Jinru, a veteran power industry expert with the China Development Bank, in an interview. "The reform is rather a systematical overhaul than a partial adjustment."

One of the major problems is how to set a reasonable transmission tariff, said Wu.

At present, many users are enjoying cheaper-than-cost electricity because of government subsidies. For example, domestic users enjoy much cheaper prices than industrial ones. And users in rural areas pay similar prices for electricity as city dwellers, even though it costs much more to supply electricity to remote vast rural areas.

Wu said how to split the subsidy costs among sellers, buyers and grid companies is a thorny problem that needs to be tackled so that direct supply can go ahead more widely.

An official with the State Grid Corp said: "It lacks sufficient supervision to guarantee effective monitoring of the sales contracts."

And without a sophisticated supervisory system, direct sales pose a major threat to the safety of the power grid, which may fail to get sufficient information about what is going on between the power users and sellers, said the official. Once the power supply exceeds the contracted amount, the overload will lead to power disruption, he added.