As China evolves towards a market economy the long-standing, command and control apparatus of regulation is becoming increasingly ineffective. This is the case in many sectors of the economy, but especially in the energy sector where the central government seeks to maintain a high degree of control. One of the principal reasons for this regulatory deficiency is the failure of the regulatory system to adapt to the increasing de facto devolution of power away from the centre to the provinces. This deficiency is compounded by the overall weakness of the judicial system.

The regulation of China's energy sector is of great importance to the national economy. The effective use of energy natural resources, a sustained level of investment in the energy industry and the protection of the environment all depend on a credible and transparent system of regulation. At present, the long-term national interest is subordinated to short-term local interests, and the central government lacks the mechanisms to impose its priorities in the operation of the energy industries. A key step to improving this situation is to devolve to the provinces powers over those issues which are primarily of local importance, and retain for the central government powers in those fields which are truly of national importance. Until this is achieved, regulation in all parts of the energy sector is likely to remain ineffective.

By PHILIP ANDREWS-SPEED and STEPHEN DOW