The Hong Kong (HK) Government is conducting a review on the regulatory and market model of the electricity supply industry (ESI), in light of the expiry of the existing Scheme of Control Agreements with the vertical integrated utilities in 2008. Although the explicit agreements provided a stable regulatory environment to facilitate the past development of the electricity industry, it was found to become inadequate to deal with the increasing demand for economic efficiency and consumer protection. As such, there is an immediate opportunity to review the current situation and, if appropriate, consider changes to the regulatory and market structure of the ESI. The objective of this paper is to examine the desirable sector policy objectives in HK and consider different instruments and strategies to meet these objectives. The first part of the policy analysis suggests that a more balanced set of policy objectives should be pursued to elevate the priority of economic efficiency but recognizing the inherit limitations in local context. The latter part of the paper reviews the regulatory instruments for their applicability and acceptability in HK. They include rate-of-return regulation, performance-based regulation, competitive bidding and wholesale market competition. With the objective of keeping risks and uncertainties to a minimum, the paper devises strategies to pursue these instruments, allowing HK to improve its regulatory framework and at the same time prepare the industry for potential introduction of competition in the future. (c) 2005 Elsevier Ltd. All rights reserved.