The Australian Energy Regulator （"AER"） formally began the process to set a default market offer（"DMO"） price for retail electricity which will likely lead to lower retail prices beginning July 1, 2019. TheAER published its position paper in response to the Australian government’s request for the AER to developan electricity price cap as recommended by the Australian Competition and Consumer Commission （"ACCC"） inits retail pricing report in June, 2018. According to the AER’s timeline, a formal decision will be made on April30, 2019.
The AER has indicated that it would prefer to use a "top-down" approach to determine the DMO due toits simplicity and transparency. Whereby the DMO would be determined based on observing currentcompetitive market prices and expectations. The AER will also evaluate a traditional "bottom-up" approachthrough cost-based analysis, but has expressed concerns about accessibility of accurate detailed costinformation and limited time.
The ACCC reported average residential electricity price in Australia had risen 55.8% to AU29.6cents/kWh from AU19.0 cents/kWh during the period 2007-2008 to 2017-2018. Average residentialelectricity price in the U.S. over the same period was US10.0 cents/kWh （approx. AU13.7 cents/kWh）。 Averageresidential electricity price in the EU over the same period was EUR13.0 cents/kWh （approx. AU20.4cents/kWh）。
We think the DMO will likely negatively impact CLP’s EnergyAustralia retail business. Our TP for CLPHoldings （00002 HK） is HK$95.00, investment rating is “Accumulate”。 Due to our expectation that CLP’sEnergyAustralia retail business will suffer as a result of the DMO and considering increased regulatory risk inAustralia’s energy sector due to the removal of the National Energy Guarantee, we will lower our TP in our nextcompany report. We will maintain our investment rating as CLP remains an attractive defensive stock withstable operations in its main Hong Kong market.