The Hong Kong economy has undergone radical changes over the past two decades and as a result profoundly affected the electricity supply industry. The level of excess capacity maintained by the two vertically integrated utilities and the tariffs they charged are both one of the highest among all developed countries, and they are the adverse results of the Scheme of Control regulation. What happened in the local electricity market has drawn much criticism among researchers and consumer groups, and major reform of the entire market is being suggested. This paper outlines the structure of the electricity supply industry and its regulatory arrangement in Hong Kong, and discusses the problems and inefficiencies caused by the specific type of regulation. Without compromising efficiency, a number of policy alternatives are proposed with a view to rectify the current problems. (C) 2003 Elsevier Ltd. All rights reserved.