INCENTIVE EFFECTS OF RATE-OF-RETURN REGULATION IN HONG-KONG

A recent paper published by this journal (Peles and Whittred 1996) dis cussed the regulatory arrangement of the Scheme of Control in Hong Kon g. Instead of encouraging electric utilities to finance their assets p roportionately more by equity as argued by the authors, the Scheme has in fact given them an incentive to rely on debt financing. A major in centive aspect of the Scheme lies in the formation of a development fu nd for making internal transfers. This development fund arrangement ha s provided an incentive for the two electric utilities to improve effi ciency and has facilitated the expansion of the electric power industr y.