Incentive effects of rate-of-return regulation: The case of Hong Kong electric utilities

A comparison of Hong Kong and United States rate-of-return regulation indicates differences in the definition of the rate base and in the proportion of it permitted a fair rate of return. These differences imply that Hong Kong electric utilities utilize proportionately more fixed (less current) assets, and that these assets are financed proportionately more by equity (less by debt), than their United States counterparts. Our results support both these predictions, providing further evidence that since rate-ofreturn regulation is implemented by reference to reported results, comparatively minor differences in regulatory frameworks can have quite dramatic consequences for utilities' asset structure and financing mix.