Taiwan is on the brink of embarking on an ambitious reform in the electricity sector. The future electricity market of Taiwan will be operated under the framework set out in the Electricity Act Amendment. Independent system operator (ISO) will be the core body of the future market operations and its establishment will therefore be the key to the liberalization. This paper presents the proposed implementation plan based on diverse factors considered by the officials. A three steps phased introduction of Taiwan ISO is discussed. During the proposed Phase I interim market arrangements, Taipower's System Operation Department will assume the role of System Operator for the market. The dispatch rules are largely based on the existing Taipower internal procedure. As competition increases, the need for increased transparency will necessitate the establishment of a fully independent ISO in Phase II to provide the real time dispatch services. This will be completed within 2 years after the passage of the Electricity Act Amendment Bill. In the last phase of the deregulation process a multilateral market arrangement for managing energy imbalance and transmission constraints will result in better outcomes in relation to the policy objectives of security and economic efficiency. The 2-year timeframe stipulated in the Electricity Act Amendment Bill is a challenge for the Government and the industry. However, a smoothly functioning Taiwan ISO will bring benefits to the industry and the country in general. (c) 2004 Elsevier Ltd. All rights reserved.